Has The Singapore Dollar Sold Off Too Much?

The Singapore dollar has been of the few currency markets to really take a hit from the coronavirus outbreak. The SGD has sold off by roughly 3% since the crisis began, with USDSGD reaching its most overbought level on record on the daily RSI. Our view is that the SGD selloff maybe an overreaction.

The Singapore dollar’s weakness was triggered in part by MAS comments that the currency had ‘sufficient room to fall’ within the current policy stance amid the coronavirus outbreak. This indicated that perhaps the lower end of the MAS’s currency band was weaker than traders had previously believed. However, the comments also suggested, to us at least, that there was little appetite for an emergency meeting and that easing at the April meeting is far from clear cut.

The current MAS policy remains one of gradual Nominal Effective Exchange Rate (NEER) appreciation and we see it unlikely that the bank will look for a one-off shift lower in its currency band or to move to a depreciatory slope. Therefore, sustained depreciation seems unlikely as the lower end of the band is estimated to be roughly 2% away from the bottom of its policy band – the level at which the MAS will provide support to the currency. Upside risks for the SGD seem to outweigh downside risks in the short term.

From a longer-term perspective the bullish case is more compelling. The currency is now at its cheapest level in real effective terms since 2011 despite continued healthy fiscal and external accounts and positive real interest rates – an increasingly scarce phenomenon globally. The economy is almost certain to take a hit this year but long-term real GDP growth prospects solid considering the already-high level of GDP per capita. Singapore also stands out in terms of its limited political risk at a time when such risks are rising globally. The country even looks sets to benefit over the long term from the rise in uncertainty facing Hong Kong’s business environment.