Singapore dollar’s heydays seen numbered as exports lose steam

The Singapore dollar has held up fairly well against the stronger greenback this year but its resilience may soon be tested.

Even after a 2% decline since end-December, the currency has stayed near top of the pack in Asia. However, it’s vulnerable to a drop in the rankings as Singapore’s economy loses traction and investors turn to the safety of the US dollar amid rising Treasury yields.

Analysts at Standard Chartered Bank, Oversea-Chinese Banking Corp. and Skandinaviska Enskilda Banken AB expect the Singapore dollar to underperform its Asian counterparts in the coming months.

“We see limited scope for further Singapore dollar outperformance, given the poor external backdrop,“ said Nicholas Chia, macro strategist at Standard Chartered. He estimated that the currency’s so-called nominal effective exchange rate is trading in the upper portion of the policy band, limiting the room for significant appreciation against currencies of major trading partners. 

Singapore’s non-oil exports declined for an 11th month in August, signaling deteriorating global demand will be a challenge for the local dollar given the economy’s reliance on trade. The city-state has already cut its growth projection for 2023 and third-quarter economic growth data due this week may show a slower pace of expansion on a year-on-year basis. 

One thing the currency has had going in its favor this year is the Monetary Authority of Singapore’s exchange rate policy stance. It has let the currency appreciate against a basket of its major trading partners to cool inflation. Focus is now turning to the policy announcement due Oct. 13. 

“The challenging export backdrop will likely continue to weigh on third-quarter GDP in ultra-open Singapore,” said Brian Tan, an economist at Barclays Bank Plc. Yet, he doesn’t see a dovish tilt from the central bank as “inflation concerns are very much alive.”

Unlike other central banks that use interest rates, the MAS responds to inflation by guiding the local dollar higher against a basket of the currencies of its major trading partners. It targets the Singapore dollar’s nominal effective exchange rate or S$NEER within a policy band and any decline in its slope should put pressure on the local dollar. 

“We ascribe a material probability of 40% that the Monetary Authority of Singapore may reduce the slope of the S$NEER band slightly should it place more weight on the weakening external outlook,” said Peter Chia, FX strategist at United Overseas Bank.

Here are the key Asian economic data due this week:

• Monday, Oct. 9: Indonesia consumer confidence
• Tuesday, Oct. 10: Australia consumer and business confidence, New Zealand retail card spending, Japan BoP current account balance, Philippine trade balance
• Wednesday, Oct. 11: RBA’s Kent speaks, South Korea BoP current account balance, Taiwan trade balance, Australia household spending
• Thursday, Oct. 12: Japan PPI and core machine orders, BOJ’s Noguchi speaks, Malaysia industrial production, India industrial production and CPI
• Friday, Oct. 13: China trade balance, CPI and PPI, New Zealand manufacturing PMI, Singapore monetary policy