By Jake Maxwell Watts
SINGAPORE-Ahead of Singapore's central bank meeting next month
that many analysts say will result in easier monetary policy for a
second time this year, the local currency is doing something
strange: it's strengthening.
Anticipation for such policy moves normally mean a weaker
currency, but Singapore's dollar has gained since the middle of
March, illustrating how Asia remains at the mercy of the Federal
Reserve which threw global markets into disarray on March 18 with a
downbeat tone in comments on the U.S. economy.
The Singapore dollar has climbed against the U.S. dollar since
the Fed statement, rebounding from lows not seen in more than four
years. The bond markets too have been volatile, with the 10-year
government bond yield slumping to 2.171% on Wednesday from 2.511%
earlier this month.
The moves are a reversal as investors earlier this year had been
ditching the Singapore dollar and buying the U.S. dollar in
preparation for a June U.S. rate increase that would make the
greenback more attractive, according to Leong Wai Ho, senior
regional economist at Barclays in Singapore.
While the Fed dropped an assurance March 18 to remain "patient"
before acting on rates, it significantly lowered its economic
outlook in the same statement, dealing a blow to those expecting an
early increase in borrowing costs.
"This, along with market positioning, which was heavily skewed
towards [holding] the U.S. dollar, have been the major drivers" of
recent Singapore dollar strength, said Jonathan Cavenagh, currency
strategist at Westpac in Singapore.
The growing risk of volatility has also been discouraging
investors from holding Singapore government bonds, especially since
it appears that the local central bank's own attempts to manage the
market are undermined by the Fed. Singapore's central bank
surprised markets in late January with a move to ease monetary
policy, sending the currency lower.
Guan Yi, investment director at Eastspring Investments in
Singapore, which manages around US$210 billion, says the asset
manager has recently reduced its allocation to Singapore government
bonds "not because we are concerned about a substantially weaker
Singapore dollar, but because we expect increased rates volatility
once [the Fed] moves to normalize monetary policy."
Despite the Fed's outsize influence on the Singapore market, it
will be the Monetary Authority of Singapore that investors will
watch next. The MAS, which uses the currency as its main policy
tool rather than interest rates as most other central banks do, is
next scheduled to meet on April 13 following an easing of monetary
policy in January at an unscheduled statement.
The central bank is widely expected to loosen policy further.
"To me it makes sensible policy to go for more easing," said
Westpac's Mr. Cavenagh. "Will the trend [of U.S. dollar strength]
continue? That seems like a fairly good estimate at this stage." He
said Westpac has a bias in favor of the U.S. dollar against the
Singapore dollar.
Indeed the Singapore dollar has handed back some of its March
gains, trading at S$1.3688 during the day on Friday. The 10-year
government bond yield rose slightly to 2.243%.
Barclays' Mr. Leong says he is "probably the only guy" who
doesn't expect the central bank to change monetary policy in April
"because any move other than holding firm will indicate to the
market that the government is concerned about growth. There is no
need to ease monetary policy to speed up that depreciation," he
said.
Write to Jake Maxwell Watts at jake.watts@wsj.com
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