No firework is expected, and none was delivered. The Monetary Authority of Singapore (MAS) kept the neutral SGD policy unchanged as widely expected (see FX policy takes backseat role ). Fiscal policy will remain centrestage as there will be a time and place for FX policy later.
One of the most important features of Singapore policymaking is that good times were used to position policy to be able to absorb adverse shocks. Public sector balance sheets in Singapore are in good shape. As a result, Singapore genuinely has “fiscal space” to absorb the Covid19 shock.
Several fiscal stimulus packages have helped to provide much needed support to the economy. This has been accompanied by MAS measures to aid individuals and businesses who are facing temporary cashflow difficulties.
After an unprecedented economic contraction in 2Q20, the Singapore economy has recovered significantly in 3Q20 as circuit breaker measures were eased and policy stimulus took effect. Despite the impressive growth bounce from the depths of the Covid-19 recession, uneven and incomplete economic recovery remains very much of a concern. Gain from the rebound could slow and it could be a long hard slog to get the economy back to where it was when the year began.
The message from Asia is that the Covid-19 virus remains largely contained and mobility indices are stabilising at a relatively high level. But a rising tide of infections and localised restrictions, especially in Europe, could hold back the pace of rebound in Singapore’s external demand. This could also prolong the headwinds for travel-related sectors.
SGD strength may take a temporary breather, but we still favour SGD as a diversified play on medium-term USD weakness. A temporary pause in the SGD appreciation maybe in the making, as both EUR and CNH (key components of the currency basket against which the SGD is managed) appreciation slow. Excessively rapid currency appreciation seems to have become a concern not only for the European Central Bank (ECB) but also the Chinese central bank. The rate of EUR appreciation is likely to remain a bigger worry for the ECB than the level of the currency given the mounting Covid-risks to European growth.
However, we expect core USD downtrend to eventually resume as the underlying reflationary outlook remains intact. We see USDSGD ending the year at 1.35 and edging down to 1.32 in a year’s time. The next catalyst for USD decline could come from the US election results. The USD could break lower against the RMB, especially in the event of a Biden victory, which could result in a less confrontational approach on tariffs.Disclaimer applicable to recommendation
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Version: July 2020