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In the short term, USD/SGD could consolidate after its rapid decline to 1.30 this month. Per the 14-day RSI indicator, the DXY Index is oversold, and the SGD and most Asian currencies are overbought. Compared to levels of the final Fed hike in July, USD/SGD has outpaced the declines in the USD Indices for the Developed Market and Emerging Asian currencies, in line with Singapore’s appreciating SGD NEER policy.
Looking ahead, we see the door opening for the Monetary Authority of Singapore to slightly ease the appreciation pace of its SGD NEER policy band in October after the Fed’s telegraphed rate cut in September. Singapore’s core inflation averaged 3.1% in the first seven months after descending to 2.5% YoY in July, its lowest level since January 2022. Full-year core inflation should fall into the lower half of this year’s official 2.5-3.5% forecast range based on the MAS’s expectation to drop discernibly in the fourth quarter. At the last policy review in July, the central bank lowered the forecast for CPI inflation to 2-3% from 2.5-3.5%. Meanwhile, the futures market has started reducing the odds of a 50 bps Fed cut at the FOMC meeting on September 18. Consensus expects incoming US data to affirm a soft landing in the US economy, namely, the US unemployment rate easing to 4.2% in August from 4.3% in July.
Over the medium term, barring shocks to the global economy and financial markets, we are assessing if USD/SGD can return to 1.20-1.32, its post-GFC range in 2011-2014. The crucial factors that lifted USD/SGD into a 1.31-1.46 range in 2015 have reversed. First, contrary to its Three Arrows launched in 2012 to weaken the JPY, the Bank of Japan wants to support the JPY with more interest rate hikes through FY2025. Second, the Fed is not hiking rates like in 2017-2018. At Jackson Hole last week, Fed Chair Jerome Powell said it was time to start lowering rates from September. Unlike other central banks, the Fed has an apparent rate cut trajectory. Per its Summary of Economic Projections in June, the Fed pencilled 25-50 bps cuts in 2024, followed by 100 bps in 2025 and another 100 bps in 2026. Third, there is no repeat of the currency war in 2015. Unlike its one-off devaluation in August 2015, China has been maintaining a balanced approach to support growth while preventing excessive volatility in the CNY. Emerging Asian currencies have recovered strongly, relieved that the high US interest rates that kept the USD strong in the past couple of years would reverse.
However, we also noted the events that led USD/SGD to rebound from 1.30-1.32 – the shock vote in the UK to exit the EU and the Trump rally in 2016, the US-China tariff war in 2018, the Covid-19 outbreak that led a global recession in 2020, and high inflation driving US interest rates significantly higher in 2022.
Today’s landscape is a mixed bad. The UK Labour Party wants to repair ties with the EU after assuming power at the July general elections. Canada joined the US and the EU in imposing tariffs on China’s Electric Vehicles. Former President Donald Trump has fallen behind Vice President Kamala Harris at the polls ahead of US presidential elections in November. The World Health Organisation believed that the mpox viral outbreak could be stopped with a comprehensive and coordinated plan of action and funding. The Fed is focused on rates cuts to prevent a further cooling in the US labour market now that inflation has fallen significantly from its peak near the 2% target. Finally, a broadening conflict in the Middle East and the Ukraine-Russia war remain the top geopolitical risks that could significantly impact the global economic outlook.
Quote of the day
”Being positive doesn’t mean ignoring the negative. Being positive means overcoming the negative. There’s a big difference between the two.”
marcandangel (Marc and Angel Chernoff)
27 August in history
In 1918, the Spanish flu arrived in Boston and started the second and deadliest wave in the US.
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