We expect the Monetary Authority of Singapore (MAS) to keep its FX policy settings unchanged at its next policy review (no later than 14 April).
The authorities are set to raise their sights on the growth and inflation outlook for Singapore as global growth accelerates and in the face of higher commodity prices. The Singapore economy ended 2020 just 2% below its pre-pandemic GDP level, highlighting the extent that policy stimulus and global industrial upswing have played in driving the economic recovery.
Recent data suggests externally driven sectors, particularly manufacturing, continue to lead the recovery. This is in line with export readings across Asia that showed broad-based demand for capital equipment and technology products, although a tempering of Work-From-Home (WFH) tech spending could slow the pace of export later in the year. The resiliency of industrial activity contrasts with the weakness in the services sector.
MAS is unlikely to be in a hurry to tighten FX policy amid a still uneven economic recovery
Source: CEIC, Bank of Singapore
The MAS is unlikely to be in a hurry to tighten FX policy. We see pressure in commodities and goods prices. But this may not generate a broader rise in core inflation as the economic recovery is expected to remain uneven across sectors for now.
The key issue ahead is whether the bounce in consumer services spending, which has yet to materialise, will lift services price inflation to reinforce higher goods price inflation. Wide divergences in performance between manufacturing and services make the path ahead still uncertain. How soon the divergence can narrow is still very much dependent on the pace of vaccine roll-out and progress in containing Covid-19 variants.
Stronger SGD NEER in anticipation of better times could test the MAS’s resolve
Source: Bloomberg, Bank of Singapore
After trading in a relatively stable range just above the mid-point of the policy band, the SGD NEER has further strengthened since late-March, perhaps in anticipation that reflation could prompt some FX policy tightening in 2022. Stronger SGD NEER in anticipation of better times could test the MAS’s resolve and potentially provide a test case for the SGD NEER to go higher over time.
Despite the stable-to-stronger SGD NEER picture, it has been a choppy ride for USDSGD so far this year after trending lower in 2H20. With a high weight on EUR and JPY in the SGD NEER basket, recent USD strength fuelled by a ‘growth up, (US) rates up’ environment has spilled over. But it is hard to see a more persistent rebound in the USD given that US monetary conditions will remain loose and global risk appetite will remain supported. EUR is also showing signs of troughing amid increasing attention to the expected pick-up in Eurozone vaccine supply. Less intense USD strength should see USDSGD decline to 1.28 in a year’s time.
