The trend of CNY and SGD under the Sino-US Trade Tension
The Chinese Yuan has depreciated towards 6.9 from 6.7 against the US dollar on renewed trade tensions. China has retaliated to higher US tariffs by imposing duties on USD60bn of American goods starting June 1. US lifted tariffs to 25% from 10% on USD200bn of Chinese goods. US President Donald Trump will probably be meeting Chinese President Xi Jinping at the G20 Summit scheduled in Osaka on June 28-29.
The yuan will likely be range-bound around 6.9 in the short run. The RMB’s move won’t please the US, as it offsets the impact of tariffs, but the currency has so far only given up this year’s appreciation. Similarly, the other Emerging Asian currencies that have done so are the Indonesian rupiah, Singapore dollar, Malaysian ringgit and the Indian rupee. As for the South Korean won, it has been weak even before the latest bout of volatility.
Short-term SGD rates have underperformed USD rates and we do not see any imminent turn around. The decline in 3M LIBOR (that has been in place since January) did not lead to lower SIBOR/ Swap Offer Rate (SOR). Similarly, the drop in US yields was not accompanied by a drop of a similar magnitude in SGS yields. Relatively tight liquidity conditions, the strong USD (exacerbated by the escalation in China-US trade row and a lack of meaningful improvement on the trade front have led to these developments). Protracted China-US trade talks and the possibility of trade war spilling over to other fronts is likely to keep the USD supported and place downward pressure on Asia FX including the SGD. A weaker SGD tends to put upward pressure on SGD rates even if the Fed stays on hold.
The SGD45bn transfer from the Monetary Authority of Singapore (MAS) to the GIC should have no implications on SGD rates. We view existing official foreign reserves (OFR) to be sufficient to defend nominal efficient exchange rate (NEER) stability and to provide adequate USD liquidity to the financial system as required. There have been some concerns that lower OFR constraints the MAS’s ability to conduct swaps (as part of open market operations) with banks, thereby reducing the amount of USD that it can be released. While theoretically true, this would only be binding if foreign reserves are low. In any case, USD/SGD basis swaps and swap-implied SGD rates are pointing to more than sufficient USD liquidity in the system.
Nominal Effective Exchange Rate (NEER)
The nominal effective exchange rate (NEER) is an inflation-unadjusted weighted average rate in terms of international trading or a basket of multiple foreign currencies. Also, this is an indicator of a country's international competitiveness in terms of the foreign exchange (forex) market.
