SINGAPORE: The Singapore dollar is poised to extend its uptrend against the US dollar in 2018, with the Monetary Authority of Singapore (MAS) set to finally move to tighten its policy next year, said analysts.
This comes as the domestic economy staged a remarkable recovery in 2017.
Rather than setting interest rates, the MAS conducts policy through the exchange rate by allowing the Sing dollar to float against the currencies of its main trading partners within an unspecified policy band and changes the slope, width and centre of that band when it wants to adjust the pace of appreciation or depreciation of the Sing dollar.
In April 2016, the central bank unexpectedly eased policy by setting the rate of appreciation of the Sing dollar's policy band at zero per cent. It has maintained a “neutral” stance since.
In its October policy statement, however, the MAS softened its forward-looking guidance by referring to comments it made a year ago that the neutral policy stance would be appropriate for an "extended period", instead of repeating it.
This, coupled with expectations for the Singapore economy to remain firm going into next year, has fuelled speculation that the central bank may be leaning towards tightening.
And 2018 would be “appropriate timing” for a shift in policy stance, according to OCBC Bank's head of treasury research and strategy Selena Ling.
Even if it opts to stand pat in April, the central bank would most likely tighten policy when it meets for the second time in October.
“The window is basically open,” said Ms Ling. “If they expect inflation to be picking up 18 months from now, they will have to move policy now.”
Apart from buoyant domestic growth and labour market improvements setting the stage for a pick-up in inflation, MAS is likely to take cues from other central banks in the region which are also mulling interest rate hikes, noted Mr Jeff Ng, chief Asia economist at research firm Continuum Economics.
The Bank of Korea became the first to do so last month after raising its benchmark interest rate for the first time since 2011. Regulators in South Korea look set to normalise rates further in 2018, according to ANZ’s senior strategist Irene Cheung.
Apart from the Philippines, Malaysia’s central bank is also tipped to raise rates and Ms Cheung expects that to happen as early as Bank Negara’s scheduled monetary review next month. Singapore will likely be “somewhere in the middle” by embarking on monetary policy normalisation in October, she added.“Growth has improved but price pressure isn’t picking up as strongly hence October will be a more likely timing for MAS to tighten,” Ms Cheung explained. And when it does, Mr Ng reckoned the MAS would opt for a modest and gradual appreciation of the Singapore dollar nominal effective exchange rate (S$NEER). “Given that growth rates have slowed and demographics have changed over the years, they will likely keep the S$NEER rather flat at around 0.5 to 1 per cent per annum slope, instead of the 2 per cent previously.” But it may not be a smooth sailing ride for the Sing dollar, said DBS Bank's senior currency strategist Philip Wee. While the greenback-Sing dollar pair will likely stay within the range of 1.33 to 1.45, he expects the local currency to depreciate in the first three quarters of 2018.This as the Singapore economy looks set to moderate slightly to 2.7 per cent growth in 2018, from the projected 3 per cent this year. On the other hand, the US economy is expected to see faster growth of 2.4 per cent for the same period. Three interest rates hikes, namely in June, September and December, by the US Federal Reserve will also give the greenback a shot in the arm. But the Sing dollar will likely rebound in the fourth quarter, said Mr Wee, as the global recovery gains traction and becomes more broad-based. “While Singapore does not have an interest rate policy, it is likely to move in October its SGD policy from its present neutral stance to a mild appreciation stance,” he wrote in a report. “We expect the SGD to bottom around 1.40 against the USD in the third quarter of 2018… but the SGD is expected to appreciate again from the fourth quarter of 2018 into 2019.” Ms Cheung from ANZ has an end-2018 target of 1.325 for the Sing dollar against the greenback, while OCBC’s Ms Ling sees the local currency trading “just under 1.33” against the US dollar by the end of next year. This year, the Sing dollar has been among the strongest Southeast Asian currencies, defying expectations with a year-to-date gain of about 7.5 per cent against the greenback.
Much of this boils down to broad-based US dollar weakness, which has also benefited other Asian currencies.