Analysts say Singapore dollar set to gain despite hawkish Fed

Prospects of further tightening by the Monetary Authority of Singapore next month were seen as supporting the currency. (Reuters pic)

SINGAPORE: The Singapore dollar is poised to strengthen against the US dollar in the second half of the year despite a hawkish Federal Reserve boosting sentiment toward the greenback, according to strategists.

The Southeast Asian currency weakened last week against the dollar after the greenback got a boost from traders pricing in a quarter-point Fed rate hike by October.

However, the median forecast in a Bloomberg survey is for the Singapore dollar to end the year at 1.26 against the dollar. That points to a gain of about 2.4% after the pair ended last week at S$1.2912.

Prospects for further tightening by the Monetary Authority of Singapore next month will support the Singapore currency, according to Australia & New Zealand Banking Group. The bank forecasts the currency will strengthen to 1.2550 by year-end.

“With risks to inflation in Singapore still tilted to the upside despite the recent fall in oil prices, prospects for further tightening beyond July will keep” the bias toward a stronger local currency, said Khoon Goh, head of Asia research at ANZ.

Unlike many of its global peers, the MAS uses the exchange rate rather than interest rates as its primary monetary policy tool. The central bank manages the Singapore dollar against a basket of currencies of its major trading partners through the S$NEER framework, allowing the currency to fluctuate within a policy band.

Investors will closely watch Singapore’s May core inflation data, due on June 23, for clues on whether price pressures have intensified in recent months and how that could influence the MAS’s policy decision at its end-July meeting.

The nation’s core CPI, which is the measure the MAS focuses on, is projected to rise to 1.6% in May from 1.4% in the previous month, according to median estimate in a Bloomberg survey.

A faster pace of appreciation in the Singapore dollar’s nominal effective exchange rate would also help contain imported inflation and keep price expectations anchored, Goh said.

Maybank Investment Bank Bhd. also sees the Asian currency getting a boost from an expected MAS tightening next month, when it believes the authority may steepen the slope of its policy band by another 50 basis points. Such a move would be supported by economic growth that remains above potential, said Saktiandi Supaat, Maybank’s head of FX research.

Similarly, Skandinaviska Enskilda Banken AB sees the Singapore dollar at 1.26 by year-end.

“We see the dollar bounce to be limited with market re-pricing a hike this year,” said Eugenia Fabon Victorino, head of Asia strategy at the Swedish bank. “From there, we expect global growth to be supportive of Asian currencies, thus allowing the Singapore dollar to rise.”