USD/SGD: Move lower unlikely to last as Fed policy and USD leg dominate – Commerzbank

The Monetary Authority of Singapore (MAS) tightened policy for the fifth time since October 2021. USD/SGD fell sharply by nearly 100 pips to the low 1.42 level after the MAS announcement. However, economists at Commerzbank believe that such a move is not sustainable.

Another shift higher in the mid-point

“MAS tightened policy once again by re-centering the SGD NEER (nominal effective exchange rate) mid-point to the prevailing level. We estimate this is akin to a one-off appreciation of +1.5%. The slope of the SGD NEER or pace of appreciation was left unchanged, which we estimate to be around +2% p.a. along with the bandwidth. This was the fifth policy tightening since October 2021 due to the persistent inflation threat.”

“We are skeptical whether the move lower in USD/SGD can persist. This is because it is likely to be dominated by the USD leg given the persistent hot US inflation reports which reinforced expectations for further Fed tightening.”

“What could change the USD/SGD picture is if we start to see reasons for the Fed to change course. It could eventually come in H2 2023 where we could see a peak in USD/SGD. This is also barring a deep global recession or shock where the USD could yet benefit on safe-haven flows.”

“For the SGD NEER, we estimate it is holding around 1% above the new mid-point for USD/SGD at 1.4210, USD/MYR at 4.70, and USD/CNY at 6.1740. The +/-2% range for the SGD NEER corresponds to USD/SGD between 1.4100-1.4670, and the mid-point at 1.4600, ceteris paribus.”