The Monetary Authority of Singapore (MAS) is anticipated to maintain its current monetary policy, according to a Bloomberg survey where 14 out of 19 economists predict no change. A minority, including notable financial entities, foresee potential easing.
Earlier this year, MAS implemented two policy cuts to foster growth; however, current stronger-than-expected economic figures suggest a possible pause. Recent data reveal that Singapore avoided a technical recession, with stability in sectors such as manufacturing, services exports, and construction contributing to the economy’s recovery.
Monetary Policy Tool
The MAS uses the exchange rate instead of interest rates as its primary monetary policy tool. It manages the Singapore dollar (SGD) against a basket of currencies from major trading partners, influencing the local currency’s strength.
The Singapore dollar nominal effective exchange rate (S$NEER) serves as the measure for currency valuation. MAS permits S$NEER to fluctuate within a specified policy band, intervening when boundaries are breached. This policy band has three adjustable parameters: the slope, which affects currency strengthening pace; the level, influencing the immediate S$NEER adjustment; and the width, accommodating volatility in S$NEER. These parameters undergo regular review.
Given the broad expectation that the central bank will maintain its current policy, we believe derivative strategies should focus on range-bound trading and lower volatility. The signal is one of stability, not a significant directional change in the Singapore dollar. This suggests selling options to collect premium could be more prudent than buying them in anticipation of a large move.
Recent economic statistics make this view more credible, as Singapore’s economy grew 2.7% year-on-year in the third quarter, handily beating expectations and showing continued strength. Furthermore, core inflation eased to 3.0% in September, reducing the pressure on the monetary authority to tighten policy further. These balanced indicators provide a strong rationale for the institution to adopt a wait-and-see approach.
Market Calm
The options market is already pricing in this period of calm, with one-month implied volatility for the USD/SGD pair recently touching a five-year low of around 4.5%. This indicates that market participants do not foresee significant currency fluctuations in the near term. Our response should be to align with this view by considering strategies like selling strangles, which profit if the exchange rate stays within a predicted range.
Looking at historical data, periods following policy pauses, like the one seen in 2016, have often led to the S$NEER trading within a tight band for several quarters. This precedent supports the speculation that low-volatility strategies will be rewarded in the coming weeks. We must, however, remain alert to the external risks highlighted by the surveyed economists, which could trigger an unexpected shift.
