Appreciation prospects for the Singapore dollar against its US counterpart are limited for now and it is more likely to depreciate if risk appetite falters as capital outflows add volatility to the currency, according to HSBC.
The Monetary Authority of Singapore, the city state’s central bank, conducts monetary policy by managing the domestic dollar against an undisclosed basket of currencies.
According to HSBC’s in-house model, the Singapore dollar NEER (nominal effective exchange rate) is currently near the top of the bank’s estimated trading band, which suggests that currency appreciation is limited.
The potential for depreciation is higher as the Singapore dollar is increasingly influenced by portfolio and banking flows, especially since international trade activity has dropped, says Perry Kojodjojo, an FX strategist at HSBC in Hong Kong.
Singapore’s huge current account surplus had helped to keep its currency stable, but as trade with the developed world continues to be weak, this has led trade- and current- account surpluses to fall.
The current account surplus was 14.8% of GDP in 2008 and is expected to fall to 10.3% this year and 9% next year, HSBC wrote in a recently published report.
But if risk appetite falls, the capital that has flooded into Singapore seeking assets such as equities and properties could exit quickly, leading the currency to depreciate.
“In this environment where risk swings very quickly, these portfolio flows will enter and exit quickly, which will add volatility to the Singapore dollar,” Kojodjojo told asiamoney.com.
The benchmark Straits Times Index has bounced back 84% from March lows to close at 2,685 points on September 23. Property prices have also recovered, although the government is worried about possible speculation and on September 14 introduced measures designed to prevent a bubble from forming.
This could lead to fewer property investments in the city-state and will also discourage excessive volatility in property markets.
Appreciation could return gradually next year if the MAS changes its monetary policy. HSBC believes that is unlikely during the Monetary Policy Committee meeting in October, but the central bank might consider doing so in April 2010 if inflation rises, the economy is seen to be recovering and growth is sustainable.
“If the ingredients are right, Asian central banks could start hiking rates before the US,” says Kojodjojo.
If that happens, it would shift from the current zero appreciation stance back to a “gradual and modest” appreciation next year. It would likely mean that Singapore would tighten monetary policy ahead of the US, which it also did in 2004.