Long SGD, long global growth beta - TDS

Sacha Tihanyi, Senior Emerging Markets Strategist at TDS, suggests that Singapore represents a very high beta pickup to both EM and indeed global IP momentum (TDS estimate around 4x - 4.5x beta to developed economy IP growth in recent years), and thus the surging growth-positive manufacturing indicators are likely to lead to Singapore’s most significant Y/Y growth acceleration since 2012.

Key Quotes

“The surging demand for Singaporean exports, in conjunction with a pickup in production and exports of other Asian and non-Asian EMs reflects a global demand factor driving the manufacturing pickup. Exports have benefited from the recovery in oil prices (impacting overall output since mid-year 2016), but also the a strong acceleration in demand for nonoil domestic production, particularly since October 2016.”

“Singaporean CPI dynamics have turned substantially more constructive, as headline inflation has moved rapidly higher after a 2-year deflationary process. Momentum in overall inflation continues to be relatively restrained, despite the rebound in the Y/Y rate, though core inflation has been climbing steadily higher with a constant and stable short term momentum since mid 2016. Both reads on inflation remain below long term averages of around 2%, and a still substantial drag on overall headline inflation from accommodation costs (23% of CPI) will restrain the headline.”

“While price dynamics do not suggest an overly hawkish reaction from the MAS, we feel that the stable and steady momentum in core CPI will certainly imply little reason for the MAS to sound dovish for the purposes of the inflation, and more crucially we believe that the MAS’s April policy statement will introduce a much improved growth outlook for the Singaporean economy, though certainty contingent on certain (U.S.) political risks related to global trade.”

“We believe there is no reason for the MAS to favour the tendency of the S$NEER to trade below its midpoint as has been the case since mid-2014, when global trade and demand for Singapore's manufacturing goods collapsed.”

“We enter into a short USDSGD in our model trading portfolio targeting 1.34, with a stop at 1.4280 (entry reference 1.3968), but remain cognizant that a U.S. trade policy remains a crucial risk factor for SGD, and a contractionary policy-induced shock would likely favour a S$NEER trading to the lower end of its band.”