Singapore Dollar Strengthens Despite Expectations for Easing

By Jake Maxwell Watts 

SINGAPORE-Ahead of Singapore's central bank meeting next month that many analysts say will result in easier monetary policy for a second time this year, the local currency is doing something strange: it's strengthening.

Anticipation for such policy moves normally mean a weaker currency, but Singapore's dollar has gained since the middle of March, illustrating how Asia remains at the mercy of the Federal Reserve which threw global markets into disarray on March 18 with a downbeat tone in comments on the U.S. economy.

The Singapore dollar has climbed against the U.S. dollar since the Fed statement, rebounding from lows not seen in more than four years. The bond markets too have been volatile, with the 10-year government bond yield slumping to 2.171% on Wednesday from 2.511% earlier this month.

The moves are a reversal as investors earlier this year had been ditching the Singapore dollar and buying the U.S. dollar in preparation for a June U.S. rate increase that would make the greenback more attractive, according to Leong Wai Ho, senior regional economist at Barclays in Singapore.

While the Fed dropped an assurance March 18 to remain "patient" before acting on rates, it significantly lowered its economic outlook in the same statement, dealing a blow to those expecting an early increase in borrowing costs.

"This, along with market positioning, which was heavily skewed towards [holding] the U.S. dollar, have been the major drivers" of recent Singapore dollar strength, said Jonathan Cavenagh, currency strategist at Westpac in Singapore.

The growing risk of volatility has also been discouraging investors from holding Singapore government bonds, especially since it appears that the local central bank's own attempts to manage the market are undermined by the Fed. Singapore's central bank surprised markets in late January with a move to ease monetary policy, sending the currency lower.

Guan Yi, investment director at Eastspring Investments in Singapore, which manages around US$210 billion, says the asset manager has recently reduced its allocation to Singapore government bonds "not because we are concerned about a substantially weaker Singapore dollar, but because we expect increased rates volatility once [the Fed] moves to normalize monetary policy."

Despite the Fed's outsize influence on the Singapore market, it will be the Monetary Authority of Singapore that investors will watch next. The MAS, which uses the currency as its main policy tool rather than interest rates as most other central banks do, is next scheduled to meet on April 13 following an easing of monetary policy in January at an unscheduled statement.

The central bank is widely expected to loosen policy further. "To me it makes sensible policy to go for more easing," said Westpac's Mr. Cavenagh. "Will the trend [of U.S. dollar strength] continue? That seems like a fairly good estimate at this stage." He said Westpac has a bias in favor of the U.S. dollar against the Singapore dollar.

Indeed the Singapore dollar has handed back some of its March gains, trading at S$1.3688 during the day on Friday. The 10-year government bond yield rose slightly to 2.243%.

Barclays' Mr. Leong says he is "probably the only guy" who doesn't expect the central bank to change monetary policy in April "because any move other than holding firm will indicate to the market that the government is concerned about growth. There is no need to ease monetary policy to speed up that depreciation," he said.

Write to Jake Maxwell Watts at [e-mail]

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