SGD trend after the FOMC conference
The Fed gave its latest interest rate forecast on March 20th that no more rate hike in Year 2019 but still has one hike for Year 2020, but that looks more like a “token” hike. We see the Fed on hold through to end-2020. Moreover, quantitative tightening by the Fed is set to stop in September, but the ECB and the BOJ may be leaning towards further easing. This will widen the yield spread of US rate with that in major economies and benefit the uptrend of USD in the short run. In contrast, the capital outflow would be a concern in emerging markets.
The US labor market indicators is still strong, but as however, with global growth showing signs of weakening, downside risk appear dominant at this point. The market generally believes that the Fed’s stance has fully tilted towards supporting the economy. Further normalization of interest rate is no longer a priority.
Given the downside risks to the global economy and the Fed's latest interest rate decision, the Singapore Monetary Authority (MAS) is unlikely to tighten monetary policy again in April, and we expect the Singapore exchange rate to outperform the US dollar in the future. Because the decline in the US dollar LIBOR (US dollar London interbank interest rate) may be coming to an end. Since it touched to its peak in the last December, 3-month LIBOR has fallen more than 20 basis points, most of which is due to the recent ample liquidity of the US dollar and the reduction in the issuance of Treasury Bills and Commercial Papers. When those short-term notes are re-issued, LIBOR will have room to rise, expanding the forward exchange rate of the US dollar against the Singapore dollar, thus pushing the Singapore dollar exchange rate up.
Today, the Singapore dollar exchange rates are going to be rangebound, in line with USD rates. However, the Singapore dollar real effective exchange rate should be 80 to 90 basis points lower than the US dollar exchange rate. Therefore, we expect the Singapore dollar exchange rate to rise.
