It’s been a long time since I’ve written stuff but I’ve only just been asked this by my friend yesterday and I thought it to be a relevant question. Basically, I’m looking for way more upside for USDSGD based on three very compelling reasons.
1. Exogenous factor 1: Slowing global growth
If anyone tells you the world economy is still healthy, give them a slap on their face and then cut off all contact from them. 99% of Europe is in a recession and Germany is about to be too. The US is muddling along with sub-par growth in the midst of record low borrowing costs and is about to face close to a trillion dollars of automatic fiscal cuts on the first day of 2013 which is projected to slice off 4% of GDP and throw the continent back into a recession. China’s growth is slowing down drastically and Japan is facing an imploding government debt bubble. Now any of these could trigger a large slump in demand for global exports and Singapore is heavily reliant on it.
2. Exogenous factor 2: Massive deleveraging of banking sector (especially Europe)
Singapore is heavily reliant of foreign capital to keep its financial sector running. Easy monetary policy from both the US, Japan and continental Europe has kept money flowing into Singapore over the past decade. With the EZ in a credit crisis, European banks are increasingly pressurised to undertake massive repartrations. According to the recent BIS report (source not verified yet), it seems that Singapore’s foreign claims on European banks total a whopping 60% of GDP. Now if the ECB does not continue to provide more liquidity to ease the credit crunch amongst banks, these banks might be forced to evacuate all overseas assets en masse. If that happens, the SGD is likely to suffer drastically and I don’t believe the MAS will step in to keep the currency propped up much.
3. Endogenous factor 1: MAS has got it all wrong
Even though local inflation was at a ridiculous 5.2% last year, a bulk of the inflation has been locally produced. Rising COE and property prices are main contributors and are all domestically produced and appreciating the local currency does ABSOLUTELY NOTHING to alleviate this. In addition to that, from personal on the ground experience, local prices are sticky and cost savings derived from nominally cheaper imports hardly find their way to the end consumer. Thus, an appreciation of the SGD, no matter how gradual, will cause more harm than good as it would stifle exports more than ease inflation.
In addition to that, oil prices have skidded much lower on the back of diminishing Iranian tensions, Saudi Arabia oversupply and extinction of global physical demand.
Hence, even though inflation is likely to drop dramatically in the coming months, it is my view that the MAS will realise it’s folly before that and rethink it’s policy stance.