MAS Blinks, Weakens Singapore Dollar To 5-year Lows

Boy, did that escalate quickly. As Bloomberg reports, Singapore's Central Bank, the Monetary Authority of Singapore (MAS) became the 10th national bank to loosen monetary policy in January alone.

The bank said it was adjusting the band in which the Singapore Dollar (SGD) trades relative to a basket of trade-weighted currencies. The MAS does not disclose details on the width of the trading band (managed float) nor the constituents of the trade-weighted currency basket. What the MAS did say was it expected inflation to come in between -0.5% to 0.5% for 2015, a downward revision from its previous expectation of 0.5% to 0 1.5%.

This comes as a surprise to markets because the MAS convenes only twice a year to decide on its monetary policy. Analysts have been quick to note that yesterday's actions probably highlighted the dire straits the regional economy might face if no action was taken.


Top pane: Nominal GDP Growth (YoY) has slowed to a crawl at just 1.6% in 4Q14. We suspect this was the primary reason for the MAS's emergency measures to weaken the SGD. To us, disinflation is merely a convenient scapegoat for competitive devaluation. Singapore is a net importer of vital materials and energy, a stronger SGD comes as a net benefit. However, exports suffer as a result Bottom pane: Annualized inflation rate was negative for the November and December of 2014. This has never happened since 2008! Deflation has hit Singapore. Good for consumers, another reason for the MAS to devalue

Top pane: Nominal GDP Growth (YoY) has slowed to a crawl at just 1.6% in 4Q14. We suspect this was the primary reason for the MAS's emergency measures to weaken the SGD. To us, disinflation is merely a convenient scapegoat for competitive devaluation. Singapore is a net importer of vital materials and energy, a stronger SGD comes as a net benefit. However, exports suffer as a result

Bottom pane: Annualized inflation rate was negative for the November and December of 2014. This has never happened since 2008! Deflation has hit Singapore. Good for consumers, another reason for the MAS to devalue

Yes, you read that correctly. One of the world's most respected central banks just said to expect deflation in Singapore this year. Here at Business of Finance, we have been banging the table and blowing the proverbial whistle on the misconstrues of price risks. Before the current episode of widespread monetary easing by central banks all across the world, there were still hermits that believed inflation was going to "explode" in our faces anytime. Gold bugs being the prime example. What fools.

We aren't surprised at all that we are indeed correct on our warnings. We'll say it again here: Deflation is the real Juggernaut in the room. Take it for what it's worth.

For those interest in reading our previous commentaries on this topic, we have included a bevy of links: here, here, here, here, here


We have complied a set of key interest rates of the Singapore money market. Note that the SF deposit rate has been at 0bp since 2010, and that the spread between the MAS's marginal lending facility and the corresponding deposit rate has never been wider since the latter hit the zero lower bound. Other cash rates remain suppressed but we note that shorter tenured SIBOR has spiked on yesterday's news of SGD easing. Collateral rates (not shown here) remain low. This is proof that Singapore markets are safe havens MAS starting easing monetary policy back in September 2006, way before global financial markets reached their various stratospheric zeniths and before the American sub-prime credit bubble popped spilling toxicity everywhere. The MAS's benchmark rate hit the zero bound in November 2008, just 2 years after interest rates started falling across the board, and mere months before global markets bottomed in May 2009. Sublime!

We have complied a set of key interest rates of the Singapore money market. Note that the SF deposit rate has been at 0bp since 2010, and that the spread between the MAS's marginal lending facility and the corresponding deposit rate has never been wider since the latter hit the zero lower bound. Other cash rates remain suppressed but we note that shorter tenured SIBOR has spiked on yesterday's news of SGD easing. Collateral rates (not shown here) remain low. This is proof that Singapore markets are safe havens

MAS starting easing monetary policy back in September 2006, way before global financial markets reached their various stratospheric zeniths and before the American sub-prime credit bubble popped spilling toxicity everywhere. The MAS's benchmark rate hit the zero bound in November 2008, just 2 years after interest rates started falling across the board, and mere months before global markets bottomed in May 2009. Sublime!

Managing the Singapore Dollar's float against major currencies such as the Dollar, Euro, and Yen is the MAS's main monetary policy tool. Contrary to other central banks, it does not adopt adjusting benchmark interest rates as one of its primary policy tools. The MAS's benchmark interest rate (Standing Facility Deposit) has been at the zero lower bound since 2010 and is set to stay there.

The MAS earlier Wednesday joined the ranks of the ECB, whose president, Mario Draghi just days ago launched Europe's most monumental financial bazooka yet.

The MAS's surprise move also came on the heels of the SNB's bombshell which probably triggered a nuclear winter over the Swiss Alps and obliterated every single sentient creature that was short the Swiss Franc.

From the SNB to the ECB, and now the MAS, currency markets have seen no respite of  volatility. USDSGD spiked 150 pips on the MAS's announcement of slowing the SGD's appreciation. The SGD has been weakening against the greenback for most of 2014 carrying over to 2015, and this trend doesn't to have exhaust itself as the Fed is steady on its path of raising the Fed Funds rates as markets expect in October

From the SNB to the ECB, and now the MAS, currency markets have seen no respite of  volatility. USDSGD spiked 150 pips on the MAS's announcement of slowing the SGD's appreciation. The SGD has been weakening against the greenback for most of 2014 carrying over to 2015, and this trend doesn't to have exhaust itself as the Fed is steady on its path of raising the Fed Funds rates as markets expect in October

The magnitude of yesterday's move is apparent here. We believe USDSGD is on its way to 1.4 and eventually test the swing highs of 1.45 established in 2010. King dollar is here to stay!

The magnitude of yesterday's move is apparent here. We believe USDSGD is on its way to 1.4 and eventually test the swing highs of 1.45 established in 2010. King dollar is here to stay!

Asia, it seems, has been the latest candidate to shudder in both the disinflationary and deflationary winds of sub-$50 crude oil prices; the Bank of India earlier this month unexpectedly lowered its benchmark repurchase rate although the country is widely expected to be the beneficiary-in-chief of cheap energy. Thailand's central bank was also pressured to lower rates yesterday but didn't yet blink. It seems all efforts were attempts to arrest decelerating growth and to boost exports. Volatility has just gotten more volatile. Brace!

We cannot of course leave out the real widow-maker that is the Bank of Japan's punchbowl, from which practically unlimited amounts of Yen flow from in extension after extension of its LSAP (large scale asset purchase program). The BoJ had recently told financial media that it was considering other "creative" methods to boost domestic price levels. We wish Kuroda and his henchmen the best of luck in their experiment with monetary Frankenstein.

Apart from Asia, Canada's central bank, a national institution that was usually well regarded by the financial community, unexpectedly lowered its benchmark rates almost 2 weeks ago, flipping the Canadian Dollar off its axis and into free fall. The reason? Low inflation and waning inflation expectations. The Danish central bank had just lowered its rates days before. Denmark on of Europe's largest energy exporters and it has borne the full brunt of Oil's collapse.

We will spare readers the agony of replaying the entire currency wars script; matters are looking ripe for another resurgence of the 2011 era of tit-for-tat, beggar thy neighbor currency wars. Although competitive devaluation is allegedly not the motive of monetary easing, it sure has the unintended effect of such. We believe though, that the MAS does intend to cheapen the Singapore Dollar to boost exports.

Here is Bloomberg with the rest of the story:

Singapore unexpectedly eased monetary policy, sending the currency to the weakest since 2010 against the U.S. dollar as the country joined global central banks in shoring up growth amid dwindling inflation.

The Monetary Authority of Singapore, which uses the exchange rate as its main policy tool, said in an unscheduled statement Wednesday it will seek a slower pace of appreciation against a basket of currencies. It cut the inflation forecast for 2015, predicting prices may fall as much as 0.5 percent.

The move was the first emergency policy change since one following the Sept. 11, 2001 attacks for the MAS — which only has two scheduled policy announcements a year — reflecting how the plunge in oil has changed the outlook in recent months. Singapore becomes at least the ninth nation to ease policy this month, as officials from Europe to Canada and India contend with escalating disinflation and faltering global growth.

“They’re essentially trying to stay ahead” by moving before the scheduled April policy review, said Song Seng Wun, an economist at CIMB Research in Singapore. “We’ve already seen so many central banks cut. For Singapore to do such an unscheduled move, it has to be against the backdrop of enormous uncertainty.”
ECB Action

The European Central Bank announced quantitative easing plans this month while Canada, Denmark and India cut interest rates. More may come — the Bank of Japan chief said the country may need to get creative in any further monetary stimulus and Thai policy makers face growing pressure to lower borrowing costs.

Countries seeking cheaper currencies are running up against a limited number of major economies where policy makers are at ease with appreciation. The exceptions include the U.S. and Switzerland, which abandoned its exchange-rate cap this month. In Australia, where an acceleration in core inflation sent the local currency higher Wednesday, the central bank has signaled it would prefer a weaker exchange rate.

Singapore’s dollar fell 0.9 percent to S$1.3512 per U.S. dollar as of 2:11 p.m. local time, the weakest since September 2010. The currency has fallen almost 6 percent against the U.S. dollar in the past three months, the third-biggest loser among 11 most-traded Asian currencies tracked by Bloomberg.
Significant Shift

The MAS will probably weaken the Singapore dollar “quite solidly” and the currency may drop to about S$1.4 against the U.S. dollar by the end of March, said Tsutomu Soma, department manager of the fixed-income business unit at Rakuten Securities.

While the exchange rate has weakened aginst the U.S. dollar, it has gained against the ringgit, euro and yen in the last three months, the central bank said.

“Since the last Monetary Policy Statement in October, developments in the global and domestic inflation environment have led to a significant shift in Singapore’s CPI inflation outlook for 2015,” the MAS said. “The global economy continues to grow at an uneven pace” and falling oil prices have curbed inflation, it said.

Singapore’s consumer prices fell for a second month in December for the first time since 2009, according to data compiled by Bloomberg. The central bank cut its 2015 inflation forecast to a range of negative 0.5 percent to 0.5 percent, from the October prediction of 0.5-to-1.5 percent.
Follows India

Today’s decision follows an unscheduled rate cut by India this month and was Singapore’s first unplanned monetary policy change since one in the aftermath of the Sept. 11, 2001 terrorist attacks in the U.S. The central bank last eased policy in October 2011.

Singapore guides the local dollar against a basket of currencies within an undisclosed band and adjusts the pace of appreciation or depreciation by changing the slope, width and center of the band.

The central bank will reduce the slope of the policy band for the island’s dollar, with no change to its width and the level at which it is centered, it said. Singapore will keep a “modest and gradual appreciation” in its currency policy band, the authority said.

“Singapore is experiencing a profound disinflation dynamic that in the absence of recovering domestic or external demand could morph into more problematic deflation,” said Glenn Maguire, a Singapore-based economist at Australia & New Zealand Banking Group Ltd. “We continue to assess Singapore as a growth underperformer in 2015.”
Policy Cycle

The MAS is sticking to its main policy cycle of scheduled statements in April and October, even as it is always prepared to conduct policy reviews in between, it said in a separate statement.

“I don’t expect a huge boost to growth from this move,” said Michael Wan, a Singapore-based economist at Credit Suisse Group AG. “Whether it arrests disinflation, I think a bit, but the bigger drivers are still what happens in the global commodity markets and especially oil.”

The Singapore economy remains on track to grow 2 percent to 4 percent in 2015, the central bank said. Gross domestic product expanded an annualized 1.6 percent in the three months to Dec. 31 from the previous quarter, less than analysts estimated, after its manufacturing industry weakened with slowing growth in China and an uneven global recovery.
— Bloomberg