While the Singdollar has gained, other Asian currencies have outpaced its advance. - ST
SINGAPORE (The Straits TImes/Asia News Network): Building upon its resilience last year to a surging US dollar, the Singapore dollar has rallied in 2023 to hit its highest level in about two years.
The Singdollar closed at 1.3199 per US dollar on Jan 16, the highest level against the greenback since it traded at 1.3175 on Jan 7, 2021.
But these gains are seen as ripe for profit-taking as currency players focus on the potential upside of other Asian currencies versus the US dollar.
Foreign exchange analysts – from Citibank to Goldman Sachs and Singapore’s own DBS Bank – are recommending that currency players wind up their long positions in the Singdollar and look for gains elsewhere.
Philip Wee, forex strategist at DBS, said the Singdollar has surged with lightning speed from its two-year low at around 1.44 to the US dollar in October last year to $1.32 in January, unwinding 16 months of US dollar gains against it.
The Singdollar will now find it hard to breach the upside of the $1.31-$1.45 established in 2015, he added.
Virtually all currencies are getting buoyed by a faltering US dollar, which rose as much as 30 per cent last year against its major peers amid interest rate hikes by the Federal Reserve and fears of a global economic recession.
This year, the bets have reversed.
With inflation in the United States having peaked last year, the market now expects the Fed to halt its rate hikes soon, and a recession, if it ever comes, will be a mild one.
Asian currencies also got an extra shot in the arm from China’s decision to shed its zero-Covid policy and fully reopen its economy.
While the Singdollar has also gained on the underlying greenback weakness and China’s reopening, other Asian currencies have outpaced its advance.
As at Jan 19, the Singapore currency has risen by 1.7 per cent this year compared with 4.5 per cent for the Thai baht, 3.8 per cent for the Japanese yen and 3.4 per cent for the Indonesian rupiah. The Chinese renminbi has jumped 3.1 per cent, adding to its 2.6 per cent rise in the final quarter of 2022.
To explain this, analysts said that while the flood of tourists expected to be unleashed by China’s border reopening will help Singapore’s aviation, hospitality and retail businesses, relatively cheaper destinations like Thailand and Malaysia are likely to benefit the most early on.
With the Singdollar’s gains seen as limited from here on, and the renminbi likely to rise even higher, banks such as France’s Societe Generale are advising its forex clients to sell the Singapore currency versus the Chinese renminbi in the offshore market. The strategy is called short selling.
Currency markets also look at economic fundamentals and monetary policy actions.
Policy tailwinds, which helped the Singdollar in 2022, are likely to be absent this year.
With Singapore’s export-driven economy set to expand at a weaker pace in line with a global slowdown, and inflation having peaked last September, the Monetary Authority of Singapore (MAS) is likely to put a pause on its tightening moves.
MAS’ policy stance favouring a stronger currency to fight off inflation was a major factor that helped the Singdollar last year.
It was among the few central banks globally that started to tighten their policy stances in response to the inflationary spiral five months earlier than the Fed.
MAS, which uses the Singdollar as the primary tool to manage price stability, switched to a currency appreciation bias in October 2021 and had since made a total of five tightening moves.
Analysts estimate that the local dollar on a trade-weighted basis may have appreciated by about 7 per cent between October 2021 and October 2022 – the fastest pace of gains ever against a basket of currencies of its trading partners.
While inflation in Singapore may yet have some way to go, signs abound that a peak has been reached, and with it the end of the monetary policy tightening cycle.
Edward Lee, Standard Chartered Bank’s chief economist for Asean and South Asia, said: “After a series of aggressive tightening moves, we see MAS pausing in 2023.”
Recent Singapore inflation data backs that view.
After experiencing multi-year high inflation for most of 2022, Singapore’s headline inflation, which includes all goods and services, came at an annual rate of 6.7 per cent in October, down from 7.5 per cent in September. That was the first year-on-year inflation pullback in 14 months.
Singapore’s inflation figures are matched by the slowing pace of price gains elsewhere, including in the US, and has raised hopes that major central banks may soon stop raising rates.
Singapore’s currency-centric monetary policy means interest rates here follow the trajectory of US rates. Additionally, the fact that it moved earlier than most central banks worldwide means MAS is likely to end its tightening cycle earlier than others.
Analysts said hiking cycles in Indonesia, Thailand and Malaysia may still have some way to go. Hence, their currencies may rise even more.
DBS’ Wee said that on a cyclical basis, “history favours the Indonesian rupiah”.
The rupiah gained after the Fed hiking cycle peaked and paused in 2006 to 2007 and again in 2018 to 2019.
