SGD outperformance should continue – BBH

In view of the analysts at BBH, Singapore is facing rising inflation even as the economy recovers which should keep the MAS on hold at its April meeting, but we think it will tilt more hawkish as the year passes and this should help SGD continue to outperform.

Key Quotes

“The economy is picking up.  GDP growth is forecast by the IMF to accelerate modestly to 2.2% in 2017 and 3.2% in 2018 from 2.0% in 2016.  GDP rose 2.9% y/y in Q4, the strongest rate since Q2 2015.  Forward-looking PMI data (new orders, new export orders) are at cycle highs, while trade data for January suggest that momentum may be growing.  As such, we see slight upside risks to the growth forecasts.”

“Price pressures are rising, with CPI accelerating to 0.5% y/y in January.  This is the highest rate since September 2014.  The MAS does not have an explicit inflation target.  However, it projects headline inflation of 0.5-1.5% in 2017.  We believe low base effects and rising energy prices will push the y/y rate above that forecast range by mid-year.  Note core inflation was 1.5% y/y in January, the highest since December 2014.”

“Rising inflation and a recovering economy support the case for steady policy at the next semiannual policy meeting in April.  The MAS typically announces its April policy decision on the same day as advance Q1 GDP data is reported.  The MAS runs monetary policy by adjusting the width, slope, and/or midpoint of an unspecified trading band around its nominal effective exchange rate (S$NEER).”  

“The MAS last eased in April 2016 by moving to a policy of zero appreciation of its S$NEER.  Since then, the economic outlook has improved and supports our view that the MAS will refrain from further easing.  Instead, it is likely to keep policy steady in April.  From its October 2016 statement:  “MAS assesses that a neutral policy stance will be needed for an extended period to ensure medium-term price stability.”  Looking forward, it should tilt more hawkish at the October meeting.  However, it may be too early to tighten policy then with an adjustment to its S$NEER trading band.  Much will depend on the global backdrop.”

“The Singapore dollar is outperforming after a “so so” 2016.  In 2016, SGD fell -2% vs. USD and was in the middle of the EM pack.  BRL (+22%) and RUB (+20%) were the best performers, while ZAR (-18%) and TRY (-17%) where the worst.  So far in 2017, SGD is up 3.1% YTD and puts it close to the best performers KRW (+6.5%), ZAR (+6%), RUB (+5.5%), and TWD (+5.2%).”  

“Our EM FX model shows the Singapore dollar to have VERY STRONG fundamentals, so this year’s outperformance is to be expected.  USD/SGD is trading at its lowest level since November 10.  A break of 1.3950 and then 1.38 is needed to confirm a test of the August 2016 low near 1.3350.”  

“Our own sovereign ratings model shows Singapore’s implied rating at AAA/Aaa/AAA.  This is consistent with the actual ratings.”