Singapore (MAS) shifted to a neutral policy stance

Reprinted from Business Times

11 Oct 2008, MAS moves to neutral; US$ may head higher - S$1.50 by end-'08, S$1.52 to S$1.55 possible in 2009, say analysts

THE Monetary Authority of Singapore (MAS) shifted to a neutral policy stance yesterday 10 October 2008 as many had predicted, citing a deteriorating global economy and moderating price pressures, thus ending a policy of modest and gradual appreciation for the trade-weighted Singapore dollar that had been in place since April 2004.

In its semi-annual Monetary Policy Statement yesterday 10 October 2008, the MAS announced that it was moving to a zero appreciation stance for the trade-weighted Singapore dollar - or S$NEER - policy band. The current level of that band will be maintained, and there will be no re-centring of its mid-point or its width, it added.

And, in what was a likely response to recent volatile moves in currency markets, it said: 'MAS stands ready to intervene to dampen excessive volatility in the S$NEER should this become necessary.'

In pictorial terms, yesterday's 10 October 2008 policy change means that the band within which the MAS fine-tunes the external value of the Singapore dollar will now flatten out to a horizontal one, compared with an upward sloping one before. DBS and OCBC researchers, who predicted the MAS change, warn the US dollar may end the year closer to S$1.50.

Explained DBS: 'In US$/S$ terms, this implies that the topside is now estimated at S$1.4890 (at the time of writing yesterday 10 October 2008), with the mid-point located at S$1.4670. This suggests that our mid-2009 target of S$1.49 is too conservative given our expectation for more euro weakness to US$1.32. Hence, we now see the US dollar hitting S$1.50 by end-2008 before proceeding higher to S$1.52 in mid-2009.'

UK-based research firm Forecast, which expects the euro to fall even further to US$1.25, warns that a further move to S$1.55 cannot be ruled out over the course of the next 12 months.
Boosted by its broad gains elsewhere, the US dollar rose to a fresh one-year high of S$1.4850 yesterday, but thereafter ended the Asian session lower at S$1.4792.

Since the early 1980s, the MAS has fine-tuned the value of the S$NEER as its main monetary policy tool.

This value, in turn, is determined by the value of a basket of currencies chosen to reflect their importance in trade terms to the local economy. In terms of weighting, some of the largest components of this basket are believed to be the US dollar, Malaysian ringgit, Japanese yen and euro.

Thus, explained DBS: 'The neutral S$NEER policy does not ensure that the US$/S$ will head up indefinitely if the US dollar chooses to reverse gear and head down again.'

The undisclosed bands within which the S$NEER are allowed to move have been widely estimated to be between 1.5 and 2.5 per cent on either side of the policy mid-point, and this was re-centred higher when the MAS issued its previous semi-annual Monetary Policy Statement in April this year 2008.

Indeed, some currency strategists, such as those at JPMorgan and UBS, believe that the S$NEER was already trading close to the weakest part of that policy band yesterday.

UBS, in particular, questioned if it was really an easing in de facto terms.

Argued its strategist, Nizam Idris, yesterday: 'With the S$NEER having already drifted down to the policy floor before the MAS announcement, the new policy leaves almost no more room for the Singapore dollar to weaken against the policy basket.

'Conversely, the new policy leaves almost 4 per cent upside room for the S$NEER.

'In other words, the new policy would allow for either a neutral policy if the S$NEER sticks to the policy floor, or tighten, leaving no room for any easing from current levels. Further upside in the US$/S$ would be purely driven by broad-US dollar moves.'

Elsewhere, researchers at Barclays Capital, who also expect the greenback to trek higher to S$1.50 if the current climate of risk aversion persists, spoke of other possible fiscal policy options further out if things get worse, or even cuts to employers' CPF contribution rate.

They suggested: 'This could be coordinated with an inter-meeting move to re-centre the midpoint of the (S$NEER policy) band lower, ahead of the April 2009 monetary policy meeting. This is more likely to occur in Q1 09, when the threat of job losses seems greater.'

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