Singapore: More policy tightening likely, so brace for more SGD strength Singapore: More policy tightening likely, so brace for more SGD strength Singapore: More policy tightening likely, so brace for more SGD strength

Singapore: More policy tightening likely, so brace for more SGD strength

Macro
Charu Chanana

Market Strategist

Summary:  The first estimate of Singapore’s Q3 GDP came in stronger-than-expected, crushing recession fears. But a more measured move by the Monetary Authority of Singapore (MAS) in tightening policy signals that headwinds remain ahead. Still, there is more room for the Singapore dollar to strengthen as we reach peak Fed hawkishness in this quarter, and SGD remains a safe-haven asset. A stronger SGD could translate into a stronger performance for importers vs. exporters.


Keeping room for further tightening

The Monetary Authority of Singapore (MAS) announced further policy tightening on Friday, in its fifth move in a year. Singapore’s central bank manages monetary policy through exchange rate settings, rather than interest rates, as trade flows dwarf its economy. The MAS therefore guides the path of the Singapore dollar (SGD) against an undisclosed basket of the currencies of its major trading partners. The central bank focuses on the level of the Singapore dollar’s nominal effective exchange rate, referred to as S$NEER, which it allows to move within a policy band.

So, three levers are used in MAS’ policy settings: the slope, the mid-point and the width of the policy band. These three inputs together allow the SGD to rise or fall against the currencies of its main trading partners. On Friday, the MAS re-centred the policy band higher without changes to the slope or the width of the band. With only one of the three levers being used, the move was potentially less aggressive than what some expected, but it was broadly in-line with the consensus. This measured move also leaves room for extending tightening into 2023 if needed, especially if inflation expectations rise following the GST increase in January.

Headwinds to growth remain

The advance Q3 GDP release of 1.5% q/q accompanied the MAS policy decision this morning, and it was a sigh of relief as technical recession was avoided after previous quarter’s -0.2% q/q. GDP growth came in at 4.4% y/y, smashing expectations of 3.5% and last quarter’s growth was also revised higher to 4.5% y/y. Key outperformance was noted in the services and construction sectors, as increasing tourism after the economy’s reopening continued to underpin further recovery in services demand.

Still, headwinds remain as the key manufacturing sector is still in doldrums, down another 3.3% q/q after turning mildly positive at 0.4% q/q in the second quarter. The effect of reopening is also likely to fade into 2023 as more economies such as Japan open their borders, and tourists get divided. Persistent inflation also highlights risks to consumer spending continue to escalate. The MAS expects price pressures to remain strong into the next year and sees upside risks to its projections which stand at 6% for this year and 5.5-6.5% for 2023. The MAS core inflation is expected at 4% this year, at the top of the 3-4% range forecast and 3.5-4.5% in 2023 after factoring in the GST increase.

Potential SGD strength and related winners & losers

SGD got a boost despite the lack of a double shot by the MAS, suggesting that the move is being interpreted as prudent, and not dovish, given the growth-inflation mix. The central bank will certainly remain data-dependent at this point, but the case for further SGD strength is still seen because

  1. Markets are pricing in the Fed rate path much better and we are in the peak hawkishness phase now
  2. Safe-haven status of the SGD makes it attractive in the recession/stagflation scenario
  3. Saxo’s technical analyst Kim Cramer sees a long-term resistance at the 0.382 Fibonacci retracement of the 2001-2011 down trend around 1.45 for USDSGD. If USDSGD closes below 1.42 there is downside potential to the 0.618 retracement at 1.3980. Some support at 1.4078-1.4055

Further strength in the SGD is negative for travel/tourism stocks as it deters tourists to cheaper destinations like Japan. Also at loss will be the companies with a large share of revenues generated outside Singapore. Singtel (Z74:xses), for instance, derives over 50% of its revenues and 70% of its free cash flow from its Australian subsidiary, Optus which besides the currency pressure is also facing penalties on data breach. Likewise, Haw Par (H02:xses), which owns the Tiger Balm brand, derives only 12% of its revenues from Singapore and may be prone for FX losses.

Meanwhile, a stronger currency could be positive for importers with largely domestic operations. Sheng Siong (OV8:xses) is a consumer staples retailer, a sector that could thrive even in tough macro conditions. It has large imports and an expanding store footprint which, together with FX effects, could translate into a better top line trend.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.