Singapore dollar has a chance of a third victory in the fight against inflation

By David Finnerty

(Bloomberg) — The Singapore dollar has outperformed all of its Asian counterparts over the past two years, and its chance to lead the region for a third year in a row lies with the central bank.

The currency gained 1.5% in 2023 as the Monetary Authority of Singapore (MAS) maintained its appreciation bias to counter inflation at its meetings in April and October. Economists expect the MAS to maintain that stance this year, with some even expecting further tightening if inflation proves stubborn.

“We continue to expect that MAS will not adjust its foreign exchange policy until 2025, but the risk of a 50 basis point increase in inflation has increased,” Brian Tan, senior regional ASEAN economist at Barclays Bank Plc in Singapore, wrote in a client note last week, citing core inflation that “is proving more resilient than its historical average.”

While most central banks manage their economies by setting interest rates, the MAS does so by influencing the local currency. It sets the slope, width and midpoint of a policy rate band for the Singapore dollar nominal effective exchange rate (S$NEER), which measures the local dollar against a basket of currencies of its major trading partners.

Inflation has been declining since the beginning of 2023. The core CPI index favored by the MAS fell to 3.2% in November, down from 5.5% in February. However, this figure is still well above the five-year average of 2%, which is a reason for the central bank to maintain its appreciation bias for the currency.

Another positive aspect for the Singapore dollar could be the underlying strength of the economy. The country's gross domestic product grew 2.8 percent in the fourth quarter, comfortably beating economists' median forecast of 1.8 percent, government data showed on Tuesday.

“Mediocre currency”

Even if the MAS decides to maintain its appreciative stance towards the currency, it is no guarantee that the Singapore dollar will once again top the Asian rankings.

“With the S$NEER approaching the upper end of the policy rate range, the scope for sustained outperformance of the SGD is severely limited,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. The local dollar “will most likely be a mediocre currency,” he said.

The MAS made a change at its October meeting: it doubled the number of meetings per year to four. This means traders will get their next glimpse of the central bank's policy later in January, rather than waiting until April as in previous years.

Here are the most important Asian economic data this week:

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• Monday, January 1: South Korea's trade balance, property prices in Australia

• Tuesday, January 2: Singapore GDP, Caixin China Manufacturing Purchasing Managers Index

• Wednesday, January 3: New Zealand property prices

• Thursday, January 4: China Caixin Services PMI

• Friday, January 5: India Annual GDP Estimate 2024, Taiwan Consumer Price Index, Singapore Retail Sales, Thailand Consumer Price Index, Japan Consumer Confidence

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