Singdollar stung by speculative shorting

Singapore

THE Singapore dollar is among Asia's weakest currencies as speculators have been shorting it as a one-way bet on expectations of further easing next month.

Year to date, only the Malaysian ringgit (MYR) and the Indonesian rupiah (IDR) have had it worse against the mighty greenback. According to Commerzbank, the ringgit and rupiah are the top underperformers. The US$ is up 6.5 per cent and 6.2 per cent against the ringgit and rupiah respectively. The S$ is the third weakest, with the US$ up 4.7 per cent since January.

While traders or speculators are attacking other currencies as well, they see the S$ as a sure thing, guessing that the Monetary Authority of Singapore (MAS) will ease the currency by 2 per cent next month.

On Friday, the S$ stood at S$1.389, falling from Thursday's S$1.380.

"Our view is to be short SGD, MYR and IDR, which should continue to underperform in the coming months," said Nomura Global Markets Research on Friday.

"Most participants expect MAS to ease again in April. So, for many speculators, the SGD has become . . . a favourite short against a USD long," said Barclays economist Leong Wai Ho.

They are going for others as well, said Mr Leong, "but the SGD offers the certainty of an expected 2 per cent payoff in mid-April, if they are right. So to speculators, it is a gamble that looks interesting."

Citi's Kit Wei Zheng is expecting the MAS to widen +/- 3 per cent the S$NEER (nominal effective exchange rate) policy band in April to deal with increased economic uncertainty and market volatility. "Wider band offers flexibility to accommodate temporary USD strength, and increases two-way risks for speculators," said Mr Kit.

In a surprise move in late January, MAS decreased the slope of its S$NEER, while maintaining its policy of a modest and gradual appreciation of the S$NEER policy band.

MAS uses the exchange rate as a monetary policy tool - unlike other central banks which use interest rates. It can make adjustments to exchange rate policy in three ways: the slope, width, and the midpoint or level of the policy band. MAS has two policy reviews each year, in April and October.

"Already, the floor of the band has been persistently tested since March," said Mr Kit. "While MAS has sufficient reserves to defend the floor of the band (after factoring in reserves managed by GIC), it may judge it futile to swim against the global tide of a strong USD."

If there is a re-centering lower by MAS in April, this will open up the space for USD/SGD to move towards 1.42 before S$NEER hits the new -2 per cent weak side of the policy band, said Nomura.

"The SGD NEER had been trading very close to the -2.0 per cent band since the MAS off-cycle decision to lower the policy slope on Jan 28, which saw the SGD accelerating its weakness against the USD," said United Overseas Bank senior economist Alvin Liew.

He added: "If the midpoint re-centering happens, our imputed end-2015 forecast will see the USD/SGD moving towards the 1.44 level, from our previous forecast of 1.40. If the SGD NEER continues its decline towards the -2.0 per cent band again even after the re-centering takes place, then the USD/SGD may move even higher towards the 1.47 level."

But it's not that everyone including Barclays' Mr Leong thinks MAS will ease next month. "These animal spirits would go away if MAS should remain on hold, as we expect in April," he said.

In January, MAS did warn speculators that it "stands ready to curb sharp movements in the S$NEER".