The Singapore dollar faces pressure due to escalating U.S. trade tensions and speculation that the Monetary Authority of Singapore (MAS) may ease its exchange-rate policy. The potential imposition of U.S. tariffs on pharmaceuticals and semiconductors, key Singaporean exports, adds risks as the SGD weakens against the recovering U.S. dollar.
Analysts, including those from Barclays, believe the MAS might adopt a more accommodative policy at the next meeting. Options include flattening the S$NEER slope to zero, particularly with low inflation expected to rise only 0.7% in June. The possibility of U.S. tariff-induced inflation affecting Fed rate cuts could further impact the SGD negatively, compounded by its use in carry trades.
Monetary Policy and Neer Management
The MAS’s monetary tool is its exchange rate policy, adjusting the SGD’s path against a basket of currencies. The MAS influences the S$NEER, reflecting bilateral exchange rates with major trading partners, within an undisclosed policy band. If S$NEER exceeds this band, MAS intervenes by trading Singapore dollars.
MAS reviews three parameters: slope, level, and width of the policy band. Adjusting these can alter SGD’s strength: the slope affects the pace of changes, the level allows immediate shifts, and width increases volatility. The next policy review will be by July 31.
We believe the probability of monetary policy easing at the upcoming meeting is high, given the external trade risks and low domestic price pressures. Derivative traders should consider buying put options on the Singapore dollar against the U.S. dollar. This provides a direct way to profit from a potential downward move in the currency following the policy announcement.
This view is reinforced by recent official data. Singapore’s economy grew a sluggish 0.1% quarter-on-quarter in the first three months of 2024, and core inflation has eased to 3.1% as of April, trending towards the lower end of the official forecast range. These figures give the central bank ample reason to adopt a more accommodative stance to stimulate growth.
Historical Context and Market Strategy
Historically, when the slope of the policy band has been flattened to zero, such as in April 2016 and during the 2020 pandemic response, the currency has depreciated. For example, following the unexpected easing in 2016, the USD/SGD pair climbed over 3% in the subsequent months. We anticipate a similar, though perhaps more muted, reaction this time around given that some easing is already being priced in by the market.
Beyond directional bets, we should also look at implied volatility in the options market, which has recently ticked higher for the SGD. An alternative strategy involves buying option straddles, which profit from a significant price move in either direction. This hedges against the risk of a surprise policy hold while still capturing gains if the central bank’s action causes a larger-than-expected swing in the exchange rate.
The potential use of the local currency in carry trades, as mentioned by some analysts, adds another layer of downward pressure. Should the central bank signal a prolonged period of accommodation, traders will increasingly borrow in Singapore dollars to fund purchases of higher-yielding currencies. This outflow would further weaken the exchange rate in the medium term.
