SINGAPORE: The Singapore dollar tumbled 1 per cent on Thursday (Apr 14) after the Monetary Authority of Singapore (MAS) surprised markets by easing monetary policy.
In a statement, the MAS said it will set the rate of appreciation of the Singapore dollar’s nominal effective exchange rate (NEER) policy band at zero percent, marking a shift from its previous policy stance of a “modest and gradual" appreciation of the local dollar.
Prior to the half-yearly monetary policy decision, a majority of economists had expected the central bank to leave its monetary policy stance unchanged. The MAS last moved to a neutral stance on the Sing dollar in October 2008.
Thursday's move hit the local currency, which widened losses to 1.03 per cent by lunchtime. The Singapore dollar fell to 1.3645 against the US dollar, its weakest level since March 29.
“The easing move was a complete surprise,” Khoon Goh, senior FX strategist at ANZ Singapore, told Channel NewsAsia. “It is a clear indication that MAS feels that the currency is overvalued, relative to the outlook of the Singapore economy.”
HSBC’s economist Joseph Incalcaterra agreed, noting that the policy decision and language from the central bank’s policy statement were “unambiguously dovish”.
“We have warned of a dovish outcome, but the (statement’s) cautiousness exceeded our expectations, notably the part where MAS said core inflation is now likely to fall below 2 per cent on average over the medium term,” Mr Incalcaterra said.
Also weighing on the Sing dollar was renewed strength in the US dollar, according to Macquarie Bank’s Nizam Idris, which posted its biggest one-day gain in more than a month against a basket of six major currencies.
Moving forward, most analysts that Channel NewsAsia spoke to expect the Sing dollar to weaken further, particularly against the likes of the Chinese yuan, Australian dollar and the Canadian dollar.
ANZ’s Mr Goh reckons that the S$NEER has further room for declines, and “if markets were to start pricing in further easing, the S$NEER could test the lower bound of the policy band”. ANZ revised its forecast for the Sing dollar in March, and expects the US dollar to fetch 1.45 Sing by end-2015.
Meanwhile, Maybank analysts believe that the central bank’s decision will fuel volatility in the local dollar and lift domestic interest rates higher on the back of expectations of further easing to come. On that, Maybank revised its forecasts for the local currency on Thursday: it now expects the Sing dollar to touch 1.3550 versus the greenback by the second quarter, and 1.3750 and 1.3850 by the third and fourth quarters, respectively.
There are also analysts who see Thursday’s slide in the Sing dollar as a mere knee-jerk reaction.
“No more appreciation bias means that the S$NEER is likely to stay very near the midpoint, plus or minus 0.5 per cent," Mr Idris, managing director and head of strategy, fixed income and currencies at Macquarie Bank, said. "That means in the long run, the Sing dollar will be a boring trade."
He added: “It will remain pretty quiet around the policy midpoint unless there’s a view that the MAS is about to make a bigger change, which I don’t think it’s the case for now given that MAS didn't change any of its macro forecasts.”