The Singapore dollar this year has established itself as Asia’s most resilient currency against the US dollar, and some strategists are betting on more strength if price pressures force the nation’s central bank to tighten its exchange-rate policy again next month.
Goldman Sachs Group Inc, Citigroup Inc and MUFG Bank Ltd are among banks that are bullish on the currency, underpinned by an expectation that the Monetary Authority of Singapore (MAS) could extend policy tightening at its October meeting to help rein in core inflation, which hit a 14-year high in July.
The predictions come as almost every major currency retreats against the dollar, with the US Federal Reserve set on an aggressive rate-hike cycle. While the MAS has turned the nation’s currency into a winner against peers in Asia, it is still down more than 4 percent against the US dollar this year.
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MUFG Bank puts the likelihood of additional tightening by the MAS next month at 50 percent, which could translate into a gain of more than 1 percent for the local currency versus the US dollar over the following months, according to Jeff Ng, a currency strategist at MUFG Bank in Singapore.
“Our call of a Singapore dollar rebound is premised on most of the Fed’s eventual rate hikes already being priced into markets now,” he said.
MUFG forecasts the Asian currency rising to S$1.38 against the US dollar by the end of this year. It closed last week at S$1.407.
Unlike most central banks that use interest rates to guide policy, the MAS responds to rising core inflation by guiding the local dollar higher against a basket made up of the currencies of its major trading partners. The central bank focuses on the level of the Singapore dollar’s nominal effective exchange rate, which it allows to move within a policy band.
Still, even if the MAS does extend its policy tightening for a fourth time this year, there is no guarantee that the local currency would rally against the US dollar. The Singapore dollar earlier this month slumped to its lowest level in more than two years, before paring this year’s decline to 4.1 percent by the end of last week.
“Despite the MAS tightening, USD/SGD has continued to inch higher amidst a broad USD rally supported by a hawkish Fed, geopolitical tensions and a slowdown in China’s growth,” Divya Devesh, head of ASEAN and South-Asia FX research at Standard Chartered Bank SG Ltd in Singapore, wrote in a note yesterday.
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