Singapore Focus Zero Appreciation Of The SGD NEER Likely To Remain In Upcoming October Meeting

Size: px

Start display at page:

Download "Singapore Focus Zero Appreciation Of The SGD NEER Likely To Remain In Upcoming October Meeting"

Willa Gibson
5 years ago
Views:

1 Zero Appreciation Of The SGD NEER Likely To Remain In Upcoming October Meeting Weak global and domestic economic conditions in recent months continue to spook central banks around the world as they maintain very dovish policy stance. Three rounds of SGD NEER slope cuts to the current % appreciation since January 215 means that the MAS does not have room to reduce the slope anymore, unless it decides to shift the midpoint lower. Strength in the SGD NEER, despite being on a zero-appreciation path prescribed by the MAS, prompted many to think that the currency was getting too strong for its own good, especially since global and domestic economic conditions were not showing signs of recovery yet. It is unlikely that the SGD NEER will be on a depreciating path. A possible easing tool is the downward shift in the midpoint. However, we think that it will be premature to use that since a downward shift was only done during economic recessions in the past, and both current economic indicators and forecasts from both the public and private sectors are not pointing to a recession. We maintain our view that market actions should increasingly push the USD/SGD pair higher to end at 1.38 by end 216. is currently not appreciating at all (ie: % appreciation). Any further easing action will probably mean that the MAS can only shift the midpoint lower. It is unlikely that the SGD NEER slope will be cut any further to a depreciating path. Other than not being done before, the implications and signal sent to the stakeholders of the Singapore economy will be too drastic. A depreciating SGD NEER means that the economy-wide, long-term labour productivity growth is expected to be in the negative zone, and that a depreciating SGD NEER is a stop-gap means to improve the costcompetitiveness of Singapore. The current period of very accommodative monetary policy (ie: the zero appreciation path of the SGD NEER) was a result of a series of moves since 215. Looking back, the first policy easing was an unanticipated off-cycle policy action in January 215. Catching market off-guard then, traders started selling down the SGD and it experienced a 3.9% drop (from /USD to /USD) in the span of one trading month. Months of poor data (particularly in the manufacturing sector) thereafter prompted the market to anticipate further easing actions in the subsequent April and October meetings. EXHIBIT A: USDSGD Actions Since January 215 The second easing (we estimated that it was a.5% cut to the SGD NEER slope to a.5% pa rate) was executed in the October 215 meeting. As the easing was less than what the market had hoped for, the SGD gained, rather than fell, 1.8% in just two days (from 1.425/USD to / USD) as a result. However, that reversed shortly and the SGD followed the easing statement by falling 3.2% within a month. The third easing (another.5% cut to the current % pa rate) came in April 216, and surprisingly, the SGD gained 2.% over the next three days (from / USD to /USD), but reversed the gains (-2.3%) one month later. EXHIBIT A shows the impact on the USDSGD after the three episodes of SGD NEER slope cuts. Global And Domestic Economic Conditions Still Not Showing Signs Of Recovery Since the last MAS monetary meeting in April 216, global economic conditions remained lackluster. Although there had been calls for governments to pursue more fiscal stimulus and structural reforms to push up economic growth, global central banks still continued on a very dovish policy path. Calls for central banks to relax on their use of monetary tools (EXHIBIT B) as the only means to jump-start economic growth probably fell out of favour as tail risk events such as the Brexit that happened in June 216 stoked fears of further slowdown in global economic growth. The Monetary Authority of Singapore (MAS) will likely be announcing its monetary policy statement sometime between 1 and 14 October 216. With a series of disappointing economic data released since the start of 216 in Singapore, market is increasingly hoping for the MAS to provide another round of easing stimulus in their upcoming October policy meeting. Such an expectation is of no surprise, since the central bank had eased the appreciation slope of the SGD NEER twice in 215, and another time in April this year. However, that final easing action also means that the SGD NEER Source: Bloomberg, Estimate USDSGD Jan15:.5% cut to 1% unexpectedly 3.9% Apr15: policy, while market was expecting another cut SGD Strengthened 3.8% Oct15:.5% cut to.5% Apr16:.5% cut to % 3.2% 2.3% 1.3 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 1

2 In Singapore, economic data released since the last MAS meeting in April had been disappointing too. Non-oil domestic exports fell 2.2% y/y during the April- August period, a result of the weak external, although the current situation is relatively not worse than during past crises (EXHIBIT C). In the labour market, resident unemployment rose to 3.% in 2Q 216, from 2.7% in 1Q 216, while 4,8 workers were made redundant in 2Q 216, up from 4,71 in 1Q 216. In fact, the Ministry of Manpower also reported that for the first time since March 21, the number of unemployed persons surpassed job vacancies in 2Q 216. The situation in the entrepreneurial sector was no better. Cessations of businesses/ companies/sole-proprietorships rose 14% y/y, 56% y/y, and 154% y/y in the first seven months of 216. The glimmer of hope now resides in the manufacturing sector, where it expanded 1.1% y/y in 2Q 216, the first positive growth rate in six quarters. But This Does Not Justify The MAS To Go On An Easing Spree Although the SGD NEER had been on a zero appreciation path, that did not stop the SGD NEER from strengthening due to a spate of dovishness from the Federal Reserve, as well as safe haven currency. This had prompted many to think that the SGD was getting too strong. In fact, since the Apr 216 MAS meeting, the SGD NEER was above the midpoint 81% of the time. Additionally, it was trading 1% above the midpoint nearly 4% of the time, and at its strongest, it was 1.5% above the midpoint on 15 Jul 216 (EXHIBIT D). With growth conditions remaining weak and inflation still benign, there had been calls in the market for the MAS to ease further (via a reduction in the midpoint) in their October meeting. Reports in the media 1 justified the proposal by pointing out that the SGD NEER is currently at its historic highest, while Singapore s GDP growth for 216 will be weak, and thus, the strong currency is hurting the economy. Moreover, media reports that the contractionary headline inflation is putting more pressure for the MAS to ease the SGD NEER further. 1 Singapore Dollar Near Record High Puts Heat on MAS to Ease Again, 8th Jul 216, EXHIBIT B: Global Central Banks Still Inclining Towards Loose Monetary Policies (Since May 214) Source: Bloomberg, EXHIBIT C: Although NODX Is Weak, Situation Not As Bad As During Past Crises Source: CEIC, Estimate % y/y "Although NODX remains weak, its not as bad as during past crises." SG Recessions NODX (Non-Elec) NODX (Elec) EXHIBIT D: SGD NEER Trading Above Midpoint Most Of The Time Source: Bloomberg, Estimate Contractionary Apr16: MAS shifted SGD NEER slope to Neutral Expansionary 119 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 SGD NEER Upper-end: 2% Mid-Point of Estimated Policy Band Lower-end: 2% Oct16: Expects MAS to kept stance "SGD NEER above midpoint 81% of the time since Apr16 action, prompting many to think that MAS will ease further by lowering midpoint in Oct." 11

3 The argument for further easing, although valid, is not sound. First, comparing an economic indicator at level (ie: SGD NEER index) with another at first difference (ie: GDP growth rate) is incorrect. As such, the easing argument contains a false premise. One needs to compare apples with apples. EXHIBIT E shows that although the SGD NEER index is at its historic highest level, so does Singapore s nominal GDP at levels. In fact, since 1999, Singapore s nominal GDP has grown nearly three times, where the SGD NEER has only gained 26%. EXHIBIT E: SGD NEER Index And Singapore s Nominal GDP Index Source: CEIC, Estimate Index (1999=1) "SG GDP has grown nearly 3 times since 1999; while SGD was up 26%." Second, the central bank s preferred indicator on their policy action dashboard is Singapore s core inflation, not headline inflation. Additionally, it is not just historic core inflation (which was, by the way,.5% in 215 and aligned with our estimation of the.5% SGD NEER slope then), but core inflation expectations. In their latest inflation report, the MAS maintained their 216 core inflation outlook of 1.%, saying MAS Core Inflation is expected to pick up gradually over the course of the year as the disinflationary effects of oil as well as budgetary and other one-off measures ease. With the central bank core inflation expectations at 1.% (higher than the.5% in 215) (EXHIBIT F), we risk looking at a steeper, and not less steep, SGD NEER slope. Third, another monetary easing exercise will imply a downward shift in the SGD NEER midpoint, given that the SGD NEER is already on a zero appreciation path. A downward shift in the midpoint was only done during economic recessions in the past, and both current economic indicators and forecasts from both the public and private sectors are not pointing to a recession. Moreover, the lowering of the midpoint will provide too strong a signal that policymakers are pessimistic about aggregate growth going forward, and such pessimism may self-perpetuate and hit consumption and investment. As such, the MAS will likely keep the current policy stance of a zero-appreciation of the SGD NEER. Maintaining our view that the U.S. Federal Reserve will hike interest rates by 25bp in December this year, market actions should increasingly push the USD/SGD pair higher to end at 1.38 by end SGD NEER Nom. GDP Index EXHIBIT F: Although Headline Inflation Still Contractionary, Core Inflation Creeping Up Source: CEIC, Estimate % y/y Headline CPI Interest Rate Outlook SORs have declined significantly over the course of 216. Primarily this has been a result of FED hike fatigue and a benign investment environment that incentivized yield hunting. SG interest rate premiums over US proved too rich to resist, especially after 2H 216 when transitioning towards US money market reforms added fresh USD funding and drove USDSGD FX swaps back into discount. We expect the status quo to prove relatively resilient because it is unlikely - 4Q16F 1Q17F 2Q17F 3Q17F 3M SGD SOR % M SGD SIBOR % Y MAS Treasury Core CPI that economic data in the near term will be able to catalyse a significantly hawkish repricing of market based FED rate normalization cycle expectations. Hence we see SORs as mainly range bound and for SG interest rate premiums over US to be under tightening pressure while market volatilities remain depressed. Indeed, the tone set at September s FOMC meeting continues to suggest that the trajectory of future rate hikes will remain low for the next few quarters that is why we have lowered our forecasts for SORs and SIBORs in our latest update. 12

4 ANNEX A: SGD NEER Chart Source: CEIC, Estimate MAS shifted SGD NEER slope from 2% to 1% in an off-cycle decision MAS shifted SGD NEER slope from 1% to.5% MAS shifted SGD NEER slope to Neutral Expects MAS to kept stance Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 SGD NEER Upper-end: 2% Mid-Point of Estimated Policy Band Lower-end: 2% 13

5 ANNEX B: Announced MAS Monetary Policy Statements / Actions Since 212 Date Scheduled Meeting? Decision Factors /Outlook Affecting Decision Bias Pivot Point External Econ Global Electronics Domestic Econ Imported Inflation Domestic Inflation Labour Mkt 12-Oct-12 yes slope at 2.5% (estimate), band width from Apr-11 level extended period of slow growth in global economy declining full year growth at 2.%, downside risks across goods-producing and services sectors, poorer PMI, NODX and IP numbers. remained benign with upside risks from spikes in food prices and oil price eased from average since Jan 211, but remained elevated due to high accomodation and private road transport costs tight labour market, weaker productivity growth, and rising wage growth to pose risks to unit labour costs 12 Apr-13 yes slope at 2.5% (estimate), band width recovery in G3, pickup in housing/private in US, Japan monetary stimulus, robust Chinese improving trend in US Semi- Book-to-Bill ratio gradual improvement for the rest of the year on the back of external recovery generally mild in recent months and projected to lower due to supply buffers in energy and food declining but with upside risks coming from wage increase pressures, lowered headline and core inflation estimate tighter labour market due to foreign labour restrictions 14 Oct-13 yes to slope and band width stronger regional economic growth, improving PMI numbers and confidence levels first drop below parity in US Semi Book-to- Bill ratio since start of 213 consistent recovery expected in manufacturing sectors with strong contributions from services sectors declining but with upside risks coming from wage increase pressures eased for both accomodation and private transportation costs. But the latter has risks of trending higher higher foreign workers levies, new rules on employment pass applications. Tight labour market 14 Apr 14 yes to slope improving economic conditions in US, Eurozone and Japan. Emerging Asia growth remains robust sales projected to grow strongly in Americas and Europe cyclical pickup is expected in externally-oriented industries in 214 and positive spillovers to benefit domestic sectors stable food and oil prices and an appreciating SGD NEER will result in low imported inflation both accomodation and transport costs had eased. However, risks of higher transport costs to come from low base in 213 and higher COE premiums in 214 labour market remains very tight with latest job vacancy-to-unemployed ratio at Wages to continue to rise, particularly in the services sector 14 Oct 14 yes to slope US economy to lead global economy but growth in the core Eurozone economies and Japan is likely to remain weak, hampered by structural headwinds. na The continued improvement in global should provide some support to the external-oriented sectors of the Singapore economy. Imported food inflation due to higher food cost. Subdued external price pressures due to ample supply buffers in the major commodity markets. With the economy at full employment, wages should continue to increase and filter through to prices particularly for services items continues to remain tight, particularly in the services sector 28 Jan 15 no lowered slope The global economy continues to grow at an uneven pace across countries, with stronger growth in the US partly offset by weakness in the Eurozone, Japan, and China. na Mixed outlook for the global economy weigh on the external-oriented sectors; domestic-oriented sectors should stay resilient. 215 growth remains at 2 4%. Imported inflationary pressures are receding, with global oil prices likely to stay subdued this year. While domestic cost pressures will remain, the pass-through to consumer prices is expected to be moderate. Tight labour market have remained, but pass-through to CPI has been slightly weaker than anticipated. 14 Apr 15 yes to slope Weak external growth environment persisted. China slowdown causing concerns Weak growth in Slowest economic growth (in 2Q) in nearly three years Depreciation in currencies of several importing nations depressed imported inflation Cost pass-through from higher domestic cost is not evident. Mark ups by firms are not significant Labour market remains tight 14 Oct 15 yes lowered slope by.5% Turmoil in financial markets since China s Aug devaluation added on to global recession risks Weak growth in Very weak manufacturing sector that contracted for four consecutive quarters on-year Depreciation in currencies of several importing nations depressed imported inflation Cost pass-through from higher domestic cost is not evident. Mark ups by firms are not significant Labour market remains tight 14 Apr 16 yes slope lowered to %, band width Still-weak global economic conditions improvement in US Semi Bookto-Bill ratio Slowest economic growth in 215 since 28/9 recession, 1Q16 GDP grew % q/q SAAR Weakness in imported inflation due to contraction in factory prices and low commodity prices Prices of cars and housing remain low, but risks of inflation moving higher due to base effects. 216 core inflation likely at lower half of.5-1.5% Labour market still tight, however, there are risks of higher labour redundancies in 216 Oct 16 yes s to slope and band width Uncertainties of full impact of Brexit and upcoming elections in U.S. improvement in US Semi Bookto-Bill ratio Headwind from the slowdown in services sector No risk in imported inflation Prices of cars and housing remain in contraction but y/y growth risks moving higher due to base effects Slight loosening in labour market as redundancies edged higher in recent 2 quarters 14

Singapore MAS Policy Preview: It s Time To Catch Up With Policy Normalization

Global Economics & Markets Research Email: GlobalEcoMktResearch@uobgroup.com URL: www.uob.com.sg/research Macro Note Singapore MAS Policy Preview: It s Time To Catch Up With Policy Normalization Monday,