Singapore currency to stay strong until 2021 on broad USD weakness

• Aug 25, 2020

THE Singdollar is likely to continue strengthening till next year amid a broad weakness of the greenback, in particular against the Chinese currency.

On Monday morning the SGD stood at S$1.3715 to the USD, weakening slightly from the S$1.3651 on Friday. Some FX experts expect it to reach S$1.35 by early next year. The low of the SGD this year was S$1.46 on March 23.

Peter Chia, United Overseas Bank FX strategist, said: “The decline of USD/SGD to below 1.40 since early June, to the current levels of about 1.37 has coincided with the broad USD weakness in the same period. “We note that the SGD is also tightly correlated to the CNY against the USD. On that note, USD/SGD is also vulnerable to the volatility that an increasingly tense US-China relationship would bring.”

The CNY has risen to 6.91 yuan against one USD from 7.16 a year ago.

Mr Chia said UOB’s USD/SGD forecasts are 1.37 in Q320, 1.36 in Q420, and 1.35 in Q121 and Q221.

CIMB private banking economist Song Seng Wun said: “We expect a stronger SGD to continue, to be the new norm over the next few months, for now.”

The firmness of the local currency is due to it being managed in a basket of currencies which have all strengthened against the USD, in particular the Chinese currency, he said.

“Although our economic conditions remain under uncertain on a relative basis in the FX markets, Asian economies are seen coming out of the crisis faster. In the FX market, there are more people worried about the USD at this point.”

China’s macro picture is looking better today than six months ago. The country has only a few imported Covid-19 cases; its domestic activities have recovered, although household consumption is uneven, or lagging output, he said.

“The more stable Chinese picture is reassuring, although US-China tensions remain worrying,” said Mr Song.

China is expected to rebound strongly to 3-6 per cent in H2 2020 after a 6.8 per cent contraction in Q1, which marked the country’s first GDP decline since 1992. It then recovered to post a positive 3.2 per cent in Q2.

The US GDP in Q2 dropped a horrifying 32.9 per cent, its worst quarterly contraction; in Q1, the fall was 5 per cent.

The US Fed warned last week that the economy will remain uneven and that it will be accommodative; in this pandemic crisis, all central banks are acting as lender of last resort.

This has led to a bubble in the equity markets, in particular the tech sector, Mr Song noted.

“Perhaps the US dollar is reflecting the fundamental US economy, that there is no straightforward V-shaped recovery,” he said.

Singapore’s strong fiscal reserves and its move to utilise it swiftly and decisively to support the economy has enabled the city-state – and, by extension, the SGD – to retain market confidence during this period of uncertainty, said currency economist Terence Wu of OCBC Bank. “This provided the basis of the SGD to strengthen in line with broad USD weakness during this period. We expect the USD-SGD to continue to be moving in line with broad USD movements in the near term,” he said.

He expects the SGD to range around S$1.37 until June 2021.

“In the longer-term (six-to-12 month) time frame, we expect the global macro situation to be normalising from the Covid-19 situation. We expect global growth to be on the uptick, and this environment will favour the cyclical Asian currencies (SGD included) relative to the safe-haven USD,” said Mr Wu.

In a note early this month, United Overseas Bank said the Covid-19 crisis appears to have taken a protracted turn for the worse, with renewed outbreaks in the US and various countries across the world.

“This has reinforced existing easy monetary policy by the US Federal Reserve and global central banks.

The two key dominant drivers of accelerated sell-off in the USD over the past month are the spike in US money-supply growth from the massive Federal Reserve easing, as well as further deterioration in US debt load in the form of a much higher US debt-to-GDP ratio,” it said.

Firstly, the massive amount of monetary policy easing and quantitative easing from the US Fed had caused a spike in US money supply, pushing US M1 money supply growth to an unprecedented 35.9 per cent year on year (yoy) and US M2 money supply growth to 22.9 per cent yoy, it said.

Secondly, the on-going spike in US debt issuance caused a marked deterioration in US debt load. As a result of intensified fiscal stimulus needs during Covid-19, US debt issuance spiked in excess of US$3 trillion across Q2 alone, just as the US economy contracted sharply; this pushed the US debt-to-GDP ratio from above 1.25 times to 1.36 times.

Ratings agency Fitch had responded promptly with a downgrade of US sovereign outlook to negative from stable, warning that “the outlook has been revised to ‘negative’ to reflect the on-going deterioration in the US public finances and the absence of a credible fiscal consolidation path”.

Darren Tay, Fitch Solutions senior Asia Country Risk Analyst, said the recent rally in the SGD has more to do with episode of USD weakness, rather than positive drivers for the SGD itself.

“Given the uncertainty surrounding the US in the run-up to the US presidential election and the growing second wave of Covid-19 infections, the SGD is likely to continue to trade stronger than SGD1.4000/USD over the coming months,” he said.

“However, the Singapore economy has also taken a much stronger hit from the Covid-19 pandemic than we previously expected in Q220; the recovery in H220 is likely to be slow and unsteady, which would limit the Singapore dollar’s strength against the greenback. We therefore, maintain our view that the SGD is unlikely to see sustained significant strength below S$1.38 over the remainder of 2020,” he said.

Source: https://www.businesstimes.com.sg/banking-finance/singapore-currency-to-stay-strong-until-2021-on-broad-usd-weakness