SINGAPORE: The Singapore dollar fell to a seven-month low on Friday (Oct 14), as a disappointing growth report card and a dovish policy statement from the central bank fuelled concerns over the outlook of the economy.
Gross domestic product (GDP) for the third quarter grew by a slower-than-expected 0.6 percent on-year, compared with forecasts of 1.7 per cent from a Reuters poll. Economic growth also contracted 4.1 per cent on a quarter-on-quarter basis, well off expectations for 0.3 per cent growth.
Despite the disappointing GDP data, the Monetary Authority of Singapore (MAS) opted to keep its monetary policy intact on Friday.
Following the MAS announcement, the Sing dollar rose slightly against the US dollar but soon weakened to 1.3872 per US dollar as of 3.40pm, hitting its lowest levels since early March.
While the central bank has opted to stand pat for now, a dovish tone in the policy statement, which implies the likelihood of further easing amid weak inflation and growth outlook, set the stage for weakening in the local currency, analysts told Channel NewsAsia.
In particular, there was the “unusual” introduction of forward guidance in this month's policy statement, said ANZ's head of Asia research Khoon Goh, referring to how the MAS stated that “a neutral policy stance will be needed for an extended period to ensure medium-term price stability”.
“Basically, that’s a clear hint that the MAS does not mind further weakness in the Sing dollar,” Mr Goh said. “I think this is one of the few times they provided a form of forward guidance in noting that the neutral policy stance would provide flexibility for the Singapore dollar's nominal effective exchange rate (S$NEER) to accommodate near-term weakness in inflation and growth”.
Bank of Singapore’s senior currency strategist Sim Moh Siong described the MAS’ policy statement as a “dovish hold” which signalled a less-than-stellar economic outlook ahead.
“Even though they are on hold, they said that if things worsen from here, there is scope for easing. It is this concern in the statement that says the outlook remains lacklustre therefore there’s a risk that we could see easing at the next meeting,” Mr Sim explained.
Analysts say the odds of further easing at the next meeting have risen, with the MAS likely to opt for a re-centering of the policy band, instead of adopting for a negative slope which would signal "an explicit depreciation policy".
But for a shift in the policy band to occur, an “adverse economic shock” would need to happen, analysts said.
The central bank is also expected to avoid an inter-meeting move, said Mr Sim, as it did last January when it surprised markets by adjusting the slope to allow the Sing dollar to appreciate at a “slightly” slower pace against its trading partners.
“Inter-meeting surprises are kind of one-off situations and as far as possible, I think they’d want to avoid that because it leaves much to interpretation and could cause market volatility.”
FURTHER WEAKNESS AHEAD
Moving ahead, analysts largely expect the Sing dollar to remain on a weakening trend, likely touching 1.40 against the US dollar by year-end. Apart from faltering growth at home, the possibility of an interest-rate hike in the United States will likely spur further strength in the greenback.
Dutch bank ABN Amro said in a note released on Friday: “Our estimates show that the S$NEER is slightly below the centre of the policy band. The SGD is testing crucial resistance zone of around 1.3830-1.3890, which had supressed prices since March this year. We maintain our view that the SGD is likely to decline to around 1.40 against the US dollar later this year.”
However, Citi analysts have a differing opinion, noting that the weakness in the Sing dollar will be temporary as the “higher hurdle to re-centering” means it may be “premature to position in anticipation of additional easing down the road”.