Fitch Solutions has lowered its forecast for the Singapore dollar's 2020 average exchange rate to $1.425 per US dollar, from its previous average forecast of $1.385, in the light of the Covid-19 crisis.
The market insights firm yesterday said the currency has "clear prospects of sustained weakness" over the course of this year, given that the risks posed by the coronavirus pandemic are likely to persist through most of the year.
This could see the Singapore dollar continue to trade within the weaker short-term trading range of between $1.41 and $1.45 per US dollar over the coming months, and between $1.34 and $1.45 in the coming quarters.
Fitch noted Singapore's currency has weakened further since the firm's February update, in line with its expectations for the pandemic to exert depreciatory pressures.
As of last Tuesday, the Singdollar was averaging $1.3943 against the US dollar for its year-to-date average exchange rate, 0.7 per cent weaker than Fitch's previous average forecast of $1.385 for the year.
According to Fitch, the growing Covid-19 caseload in the Republic is likely to keep the currency on a weakening path, especially with the circuit breaker being extended till June 1. "This would weigh on growth as well as confidence towards Singapore's management of the crisis," Fitch wrote.
That being said, though there had been a doubling in the number of confirmed cases in one week since April 20, the Singdollar remained mostly stable during that time. Between April 20 and April 27, it traded close to $1.42 per US dollar.
The currency's relative resilience, following a sell-off in the middle of March, suggests the Monetary Authority of Singapore is unwilling to allow the exchange rate to depreciate much further than current levels, Fitch said. "We expect the central bank to continue supporting the currency over the coming months," it added.
For next year, Fitch yesterday revised its 2021 average exchange rate forecast downwards to $1.41 per US dollar from its earlier forecast of $1.37, given the weaker position that the currency will likely be in by the end of this year.
"We maintain a slightly more sanguine long-term outlook for the SGD (Singdollar), given our expectation that Covid-19-related risks would have at least begun to recede by the end of 2020," the firm wrote.
"We continue to expect the likely economic recovery in 2021 to support a stronger SGD, but note that any upside will be limited by factors such as Singapore's diminishing growth advantage over the US."
Fitch forecast a growth rate of 2.6 per cent for Singapore next year, and 3 per cent for the United States.
Downside risks to Singapore's short-and long-term exchange rate forecasts include a second large Covid-19 outbreak within the local community or a longer-than-expected timeline to control the spread of the virus among foreign workers living in dormitories.
These could lead to further extensions of circuit breaker measures in Singapore beyond June 1, which would imply further negative shocks to the city state's already battered economy, Fitch said. This could, in turn, shake investor confidence further and spark another sell-off of the currency, it added.
Next year, there are also risks that the Singdollar would suffer, if the global economy struggles to get back on track post-pandemic due to factors such as spiking unemployment in key economies, including the US.
This would likewise weigh on Singapore's small and open economy and thus its currency, Fitch noted.
