The Singapore dollar may maintain its lead over Southeast Asian peers as it trades increasingly in lockstep with offshore yuan while keeping its deeply inverse correlation with the greenback, a Bloomberg analysis shows.
Singapore’s dollar and the yuan have moved in tighter sync than any other Asian currency pair since the Middle East conflict began. Policy tightening by the Monetary Authority of Singapore this week also provides a key tailwind as the yuan’s climb toward a three-year high further boosts the local dollar.
This is partly a result of Singapore’s exchange-rate based policy. Unlike most central banks that use interest rates to manage inflation and ensure price stability, the MAS manages the currency against a trade-weighted basket within an undisclosed policy band. Bloomberg Intelligence estimates that the yuan’s weighting in the Singapore dollar trade-weighted basket is the second heaviest at 11.9%.
The yuan’s impact on the Singapore dollar is via its "high weight in the Singapore nominal effective exchange rate basket,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group.
He expects the "higher slope of the policy band,” which allows for faster Singapore dollar appreciation and the city state’s attractiveness as a safe haven to help the local dollar outperform regional peers.
The Singapore dollar has slipped 0.4% since the start of the Iran conflict, yet it continues to fare better than regional peers like the Malaysian ringgit and the Philippine peso.
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The currency’s 30-day correlation with the yuan has risen to 0.90 since the start of the Iran war from around 0.6 at the end of February.
Meanwhile, its link to the Bloomberg Dollar Spot Index stands at -0.94, the most negative among emerging Asian peers. As the dollar index has already fallen nearly 2% this month on hopes for a conflict de-escalation, further declines may provide an additional boost to the Singapore dollar.
A weaker greenback and potential MAS policy tightening in July could push up Singapore’s nominal effective exchange rate, Maybank strategists including Saktiandi Supaat wrote in a note on Tuesday.
The bank forecasts the Singapore dollar will appreciate to 1.26 by year-end. It was hovering around 1.27% on Thursday. - Bloomberg
