Why analysts are bullish on the SGD

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“The Singaporean dollar is generally considered a safe-haven currency against its Southeast Asian counterparts,” said Max Lin, Asia currency and rates strategist at Credit Suisse.

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The Singapore dollar has remained resilient against the strength of the US dollar against its regional counterparts, and analysts say it is a relatively “safe haven” currency, particularly in Southeast Asia.

Singapore’s currency has fallen almost 6% since the start of the year, but other Asian currencies have weakened even more against the greenback.

The Japanese yen has depreciated by around 25% against the US dollar since the start of the year, while the Philippine peso has fallen by around 15% and the Thai baht by 13% during the same period. .

This comes as the US central bank continues to take a hawkish stance on inflation.

Last Wednesday, the US Federal Reserve raised benchmark interest rates an additional 75 basis points for the third consecutive time and announced that it would continue to raise rates to 4.6% next year before to stop.

The news pushed the US dollar to a new two-decade high and widened interest rate differentials between the greenback and many other Asian currencies.

Banking analysts say they are bullish on Singapore’s currency, even though it fell to its lowest level in 29 months on Thursday after the Fed’s hawkish policy outlook.

“The Singaporean dollar is generally considered a safe-haven currency against its Southeast Asian counterparts,” said Max Lin, Asia currency and rates strategist at Credit Suisse.

He cited Singapore’s high foreign currency reserves, strong current account surplus and well-managed monetary policy as some of the reasons for the resilience of the Singapore dollar.

Singapore dollar betting

1. Solid economic fundamentals

“Whenever there are crises or shocks, there has been interest or [a] switch to Sing-dollar,” said Saktiandi Supaat, regional head of forex research and strategy at Maybank.

Singapore is one of the few countries in the world to have a triple-A sovereign credit rating, a strong current account surplus and positive foreign exchange reserves – factors that contribute to its safe-haven position for investors, Supaat pointed out.

“Singapore has large excess reserves to weather crises. That definitely makes it one of the elements of a safe-haven currency,” he told CNBC. “Given its other characteristics, it can play a role in filling some of the gaps in refuge space.”

The Singapore dollar is “still one of the strongest in the region” and its strength will benefit companies that have Treasuries in the country, said Philip Wee, senior economist at DBS Bank.

“In times of exceptional dollar strength, [the Singapore dollar] retains its value the best…it doesn’t depreciate as much as the others and it’s backed by its [exchange rate] policy and framework,” he said.

He said the Singapore dollar is “a safe haven for investors whose currencies are less resilient.”

2. Central bank policy

Unlike many central banks, the Monetary Authority of Singapore (MAS) uses the nominal effective exchange rate of the Singapore dollar, known as S$NEER, to control inflation.

Most other Asian countries use interest rates as their primary policy tool to manage inflation.

“Singapore’s small geographical size and status as a small open economy means almost all consumer goods are imported,” Lin said.

“Therefore, MAS responds to high inflation by allowing the Singapore dollar to appreciate against peer currencies, thereby lowering the cost of imported goods in local currency terms.”

“I believe investors also associate the strong [Singapore dollar] with the competence and reliability of Singapore, as a partner and gateway to the region,” said Wee.

Lack of liquidity

Even though the Singapore dollar has been a strong performer in the region, it won’t replace the Japanese yen as a safe-haven currency in Asia anytime soon, analysts told CNBC.

The Singapore dollar is not as widely traded as currencies of major economies, Maybank’s Supaat pointed out.

“It’s not deep enough in terms of liquidity,” he said, adding that it’s not as widely traded as the Australian dollar, British pound or even the Japanese yen.

Singapore’s currency is also not immune to US dollar strength, said Wee, who warned that the Singapore dollar could lose its footing as Asia’s outperformer in the event of a global recession.

Normally, when there is a global recession, Singapore’s nominal effective exchange rate tends to decline from the top to the bottom of the [policy] band, potentially weakening the Singapore dollar to the 145 level against the dollar, the monetary economist said.

“That’s the main risk, or the main risk, for investors looking to [the Singapore dollar] as a refuge,” Wee added.

Maybank said it expects the MAS to continue on the policy tightening path as the country continues to battle inflation which hit a 14-year high in July.

However, Lin said Credit Suisse expects “the Singapore dollar to weaken against the US dollar” and predicts the currency will weaken to 143 by the end of the year.

Japan’s intervention in yen

To stem the sharp fall in the yen, Japan is said to have intervened in the foreign exchange markets – the first intervention since 1998.

Thursday’s move came after the yen weakened past the 145 level following the Bank of Japan’s decision to keep interest rates steady and stick to its interest rates ultra-low.

The currency strengthened by more than 2% against the greenback on the announcement of the intervention, but analysts believe that its rise should not last.

“On the one hand, the Ministry of Finance is reducing the supply of yen via occasional foreign exchange interventions, but the Bank of Japan continues to stimulate the supply of yen with its regular purchases of [Japanese Government Bonds] as it applies its 10-year JGB yield target,” Lin said.

“Because Japan has an open capital account and much lower interest rates than the United States, the ‘impossible trinity’ dictates that it is impossible for the Japanese authorities to control its exchange rate,” he said. he said, referring to economic theory which states that no country can have a fixed exchange rate, an independent monetary policy and free capital flows.

“To avoid long-term yen weakness, the BoJ should raise interest rates [or] the JGB’s return target, or Japan should impose capital controls – the latter is extremely unlikely,” he added.

The Japanese yen was trading around 144.38 against the greenback early Tuesday in Asia.

– CNBC’s Jihye Lee contributed to this report.

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