Why Analysts Are Optimistic on SGD

“The Singapore dollar is often seen as a haven against its Southeast Asian peers,” said Max Lin, Asia FX and rate strategist at Credit Suisse.

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The Singapore Dollar still resilient against the rise U.S. dollar compared with regional peers and analysts say it is a relatively “safe-haven” currency – especially in Southeast Asia.

Singapore’s currency is down nearly 6% so far, but other Asian currencies have been even weaker against the greenback.

The Japanese yen has depreciated by about 25% against the US dollar since the beginning of the year, while Philippine Peso about 15% off and Thai Baht lost 13% in the same period.

It comes as the US central bank continues to take a hawkish stance on inflation.

Last Wednesday, US Federal Reserve raises benchmark interest rates added 75 basis points for the third time in a row, and signaled that it will continue to raise rates up to 4.6% next year before stopping.

The news pushed the US dollar to new levels highest in two decadesand widen the interest rate differential between the greenback and many other Asian currencies.

Bank analysts say they are bullish on the Singapore currency even though it fell to a 29-month low on Thursday, following the Fed’s hawkish policy outlook.

“The Singapore dollar is often seen as a haven against its Southeast Asian peers,” said Max Lin, Asia FX and rate strategist at Credit Suisse.

He cited Singapore’s high foreign exchange reserves, strong current account surplus and well-managed monetary policy as some of the reasons for the Singapore dollar’s resilience.

Bet on Singapore Dollar

1. Solid economic foundation

“Whenever there is a crisis or shock, there is concern or [a] Saktiandi Supaat, regional head of forex research and strategy at Maybank, said.

Supaat pointed out that Singapore is one of the few countries in the world with a national credit rating of 3-A, a strong current account surplus and positive foreign currency reserves – factors that have contributed to Singapore becoming a safe harbor for investors.

“Singapore has a significant amount of surplus reserves to weather crises,” he told CNBC. That makes it definitely one of the elements of a safe-haven currency. “Given its other characteristics, it could play a role in filling some of the gaps in safe haven spaces.”

Philip Wee, senior currency economist at DBS Bank, said the Singapore dollar “remains one of the most resilient currencies in the region” and its strength will bring benefits for companies with domestic coffers.

“In a time when the dollar was so strong, [the Singapore dollar] is the one that preserves its value best… it doesn’t depreciate as much as others and is backed by [exchange rate] policies and frameworks,” he said.

He said the Singapore dollar is “a haven for investors with less resilient currencies.”

2. Central Bank Policy

Unlike many central banks, the Monetary Authority of Singapore (MAS) uses the nominal effective exchange rate of the Singapore dollar – known as S$NEER – the policy margin to control inflation.

Most other countries in Asia use interest rates as a primary policy tool to manage inflation.

Singapore’s small geographical size and status as a small, open economy mean that nearly all consumer goods are imported, says Lin.

“As a result, the MAS responds to high inflation by allowing the Singapore dollar to appreciate against parity currencies, thereby reducing the cost of imported goods in terms of local currency.”

“I believe investors also associate these [Singapore dollar] with Singapore’s capacity and reliability, as a partner and gateway to the region,” said Wee.

Lack of liquidity

While the Singapore dollar has been a strong performer in the region, analysts told CNBC, it won’t soon replace the Japanese yen as Asia’s safe-haven currency.

The Singapore dollar is not as widely traded as the currencies of larger economies, Maybank’s Supaat points out.

“It’s not deep enough in terms of liquidity,” he said, adding that it’s not as widely traded as Australian dollar, GBPor even Japanese yen.

The Singapore currency is not immune to the strength of the US dollar, Wee said.

Normally, during a global recession, Singapore’s nominal effective exchange rate tends to fall from top to bottom. [policy] There is a possibility of weakening the Singapore dollar to the level of 145 against the US dollar.

“This is the primary risk, or primary risk, for investors looking for [the Singapore dollar] like a paradise,” Wee added.

Maybank said it expects the MAS to continue on its path of policy tightening as the country continues to grapple with inflation that has reached its peak. 14-year high in July.

However, Lin said Credit Suisse expects that “the Singapore dollar will weaken against the US dollar” and predicts that the currency will weaken to 143 by year-end.

Japanese Yen Intervention

To prevent a sharp drop in the yen, Japan is said to have intervened in the currency market – first intervention since 1998.

Thursday’s decision came after the yen weakened past 145 following the Bank of Japan’s decision to keep rates steady and stick to ultra-low interest rates.

The coin has strengthened more than 2% against the greenback on news of the intervention, but analysts say its rally is unlikely to last.

“On the one hand, the Ministry of Finance is reducing the yen supply through occasional foreign exchange interventions, but the Bank of Japan persists in boosting the yen supply with regular purchases. [Japanese Government Bonds] Lin said.

Strategist says Dollar-yen could hit 150 by early 2023

“Because Japan has an open capital account and much lower interest rates than the US, the ‘impossible trio’ assumes that the Japanese government cannot control its exchange rate,” he said, suggesting refers to the economic theory that no country can have a fixed exchange rate, an independent monetary policy, and free capital flows.

“To prevent long-term yen weakness, the BoJ will have to raise interest rates [or] JGB yield target, or Japan will have to impose capital controls – this is extremely unlikely,” he added.

The Japanese yen traded at around 144.38 against the greenback early Tuesday in Asia.

– Jihye Lee of CNBC contributed to this report.

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