The SGD dilemma – To ease or not to ease (again), that is the question
To answer the easing question for this April's policy meeting, one needs to acquaint with the series of events that has happened so far:
January 2015 – Et, tu MAS?
MAS (Monetary Authority of Singapore) hopped on the easing bandwagon along the likes of Canada, India, Europe and surprised the market with an off-cycle easing measure – looking to reduce the appreciation of the NEER. (one might refer to this as the slope)
Why was this significant/shocking?
MAS holds biannual meetings (April & October) to adjust monetary policies unlike most other central banks whom hold it every month or so. Over the years, it has built up a reputation of being reliable and trustworthy. (I tend to think this is increasingly important especially in this phase of "currency wars". Think SNB before they removed the peg, but I digress.) Throughout the history of the MAS, there was only one off cycle easing measure (intervention) which happened after 9-11. Till now, even the onset of risk events such as SARS or the global financial crisis did not result in such intervention, thus emphasizing the importance of this move.
For those who might be unfamiliar with the workings of the exchange rate policy, please take a look below for a quick snapshot. There are three main features of the exchange rate system in Singapore.
The Singapore dollar is managed against a basket of currencies of our major trading partners.
MAS operates a managed float regime for the Singapore dollar with the trade-weighted exchange rate allowed to fluctuate within a policy band.
The exchange rate policy band is periodically reviewed to ensure that it remains consistent with the underlying fundamentals of the economy.
More in-depth details can be found in the link below. http://www.mas.gov.sg/~/media/manual%20migration/Monographs/exchangePolicy.pdf
So how did MAS intervene?
"MAS will therefore continue with the policy of a modest and gradual appreciation of the S$NEER policy band. However, the slope of the policy band will be reduced, with no change to its width and the level at which it is centred. This measured adjustment to the policy stance is consistent with the more benign inflation outlook in 2015 and appropriate for ensuring medium-term price stability in the economy. "
The two important factors that MAS looks at, Growth and Inflation.
2015 Growth Outlook (January): Regional economies were being affected by the falling commodity prices, China was starting to slow down, Japan remains weak and Europe's recovery was lacklustre. The only silver lining was US, with her economy picking up and near-term risks of a rate hike steadily increasing. However, net impact was still a slowdown in Q4 growth in Singapore, although MAS' view was that domestic growth should remain resilient and that we were still on path towards the projected 2-4% growth in 2015.
2015 Inflation Outlook (January): MAS Core Inflation moderated to 1.6% y-o-y in Q4 2014 from 2.1% in Q3, while CPI-All Items inflation fell to -0.1% from 0.9%. The sudden fall in oil prices was a big factor and at these persistently low levels, inflation was bound to be subdued, reinforced by the Pioneer Generation package and overall weaker spending. Thus, the inflation outlook was subsequently revised lower in January's announcement.
3 months forward, what has changed now?
2015 Growth Outlook (April): Similar concerns in the region and China's growth story remains dubious. However, optimism in Japan and Europe (Post QE) is beginning to pick up and the US remains an economical juggernaut. Domestically, for Q1, retail sales and F&B spending have both decreased and projected GDP growth appears to be lacklustre clocking approximately 1.6%. Furthermore with Sibor rates spiked up even before the FED hikes, property demand is likely to remain capped.
2015 Inflation Outlook (April): Oil prices remain subdued as expected and projections remain low for the rest of 2015. Spike in Sibor expected to drag the property market further. The only major change here would be the announcement of the 2015 finance budget, with a hike in government spending to 16.9% of GDP up from 14.8%. This should aid the deflationary pressures and one can only guess that this was specifically engineered for this exact purpose.
Back to the question, To ease or not to ease (again)?
My personal take is that risks are skewed to a unchanged NEER this time round, with a possibility for band widening. Frankly speaking, it was not a clearcut conclusion to make but lets consider the following scenarios:
Unchanged NEER: Signals confidence about the strength and recovery of the economy and that the previous easing measure would be sufficient to maintain the growth target of 2-4%. Concerns of disinflation in H2 expected to be offset by budget 2015. Reserves expected to hold up to defend against any lack of growth until the next policy meeting. (chances of another unexpected policy in between April & October are almost zero, short of a black swan event)
Band Widening: Acknowledgement of the volatility spike in the NEER. Widening of the bands allow for more flexibility and buys more time for the next meeting in October. Also puts less stress on the reserves to defend the bands.
Re-centering of the NEER band: Clearcut dovish message, signalling a lack of confidence in the rebound of SG economy in light of the recent events. Double easing in a short span of 4 months is unheard of and this would cause a rapid selloff in SGD.
Band widening + Re-centering: Extremely dovish with concerns on volatility. I personally don't think this is happening.
Where are we now?
Estimated SGD NEER
A strange phenomenon. Post the surprise ease in January, SGD on a trade weighted basis traded weakly and was projected to have reached the bottom of the bands. However, the 2 weeks have seen a sharp rebound in SGD strength back towards the middle of the band. It remains a mystery whether this is the result of a MAS intervention or simply the market changing its views on the SGD.
How should one trade this going into the meeting?
This very much depends on the current positioning of the market and from my estimates, it seems like the persistent shorts from the past months have been flushed out this week and market sentiment is leaning towards a more neutral position. i.e. If I turn out to be right and we do get an unchanged NEER or possibly a widening, the impact should be close to minimal with a knee-jerk reaction higher. From a risk-reward perspective, it doesn't pay off to be holding any positions into the meeting. Instead, fade any topside knee jerks after the announcement. (E.g. Buy USDSGD if it dips.)
As always, comments and feedback welcome.
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