Andrew Robinson, Market Analyst, Saxo Capital Markets
SINGAPORE, Oct. 13, 2011 /PRNewswire-Asia/ -- The Monetary Authority of Singapore conducts its semi-annual review of monetary policy on Friday October 14th amid a gloomy external outlook and a stubbornly-high inflation rate. This suggests a finely-balanced argument for the next policy step and we take a look at the possible scenarios/responses and likely market reactions.
(Logo: http://www.prnasia.com/sa/2010/01/18/20100118801199.jpg )
Background
On the economic front, the second quarter saw Singapore posting its first quarter-on-quarter negative growth since Q3 2010 as export markets in Europe and the US slowed. Following the -6.5% recorded in Q2, current surveys suggest that growth will rebound modestly in Q3 with median forecasts of +0.8% q/q growth (though the sample ranges from -7.1% to +7.7%.) though it would be easy for any undershoot to drag Singapore into a technical recession.
On the one hand, industrial production has shown some improvement on an annualized basis since hitting a cycle bottom in May, but PMI data, mirroring what we are seeing elsewhere in the globe, has been below the 50 threshold since July, and trending lower since April. Unemployment remains low, holding below 2.3% since end-2009 and registering 2.1% in Q2, a level that some feel is close to full-employment for the island state.
Inflation, the major issue for most Asian economies these past 2 years, remains stubbornly high and hit a cycle high of 5.7% y/y in August. The MAS's core inflation, which excludes housing and transportation came in at 2.2% in Q2 and is expected to hold in the 2-3% range for the full year. The big debate is whether this is too high to prevent an MAS easing or can we regard it as still a temporary phenomenon?
Scenarios
1. No Change (10% chance) -- maintains the SGD NEER trading band
at current levels, no re-centering and keeps the slow/gradual
appreciation of SGD (currently seen at +3% per annum) policy
in place.
2. Re-centre of band (10% chance) -- brings the centre of the
SGD NEER trading band to current levels but maintains the
current SGD appreciation slope.
3. Slower Appreciation Path (30% chance) -- Reduce the slope of
appreciation from the current 3% with no re-centering of the
trading band
4. Neutral Stance (50% chance) -- Reduce slope of appreciation to
zero, possibly even combined with a re-centering of the SGD NEER
trading band.
Implications for the SGD
While the SGD NEER measures the SGD's value against a basket of currencies, for illustration purposes we will adopt a USD-neutral stance and plot suggested reactions in USD/SGD.
(Photo: http://www.prnasia.com/sa/2011/10/13/20111013132325304345.html )
Scenario 1: Market's least likely outcome will produce a kneejerk firmer SGD but 200-day MA just below 1.25 is expected to limit losses.
Scenario 2: Another kneejerk reaction higher for the SGD but not to the same extent as scenario 1 and likely confined to the 50% Fibonacci retracement of last large up-move, currently at 1.2600.
Scenario 3: A less-dovish outcome than is currently expected so SGD weakness will be limited at first but accelerating after a period of consolidation.
Scenario 4: Preferred outcome, SGD to trade on the weak side back to the recent high at 1.32.
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About Andrew Robinson, Market Analyst
Andrew Robinson has close to 30 years of experience in the financial markets and worked in key financial centers in London, Europe and Singapore. His expertise lies in FX, short-term interest rate products and precious metals.
Andrew joined Saxo Capital Markets in 2008 and currently writes a daily market commentary for the Asian FX trading session. He also contributes regularly to the Saxo Capital Markets' blog (http://saxocapital.blogspot.com) and contributes articles with an Asia perspective to regional print media.
Andrew is a regular contributor on CNBC, Bloomberg and Thomson Reuters.
Media contacts:
Saxo Capital Markets Pte Ltd
Celeste Fong
Tel: +65 6303-7713
Email: [email protected]
SOURCE: Saxo Capital Markets Pte Ltd
