Deutsche Bank says Singapore dollar could fall to $1.40 to US dollar on tumbling oil prices

Bearish forecasts for the Singapore dollar are growing amid expectations that plunging crude oil prices will lead authorities here to loosen monetary policy, CNBC reported on Tuesday.

Deutsche Bank told the financial news channel the Singapore currency could weaken to $1.40 to the US dollar this year, a level not seen since July 2010, while Standard Chartered said it expects it to hit S$1.37.

The Singapore dollar, which is currently trading around $1.33, has dropped more than 7 per cent against the U.S. dollar over the past six months as the US central bank ended its massive bond buying programme and prepared to raise interest rates, and appears on course for further weakness given lower oil prices, said analysts.

Declining inflation will lend a dovish tilt to the Singapore central bank's policy bias this year amid cheaper oil prices, underpinning currency weakness, Deutsche Bank said in a recent report, CNBC reported.

Energy and food items combined have a weighting of 27 per cent in Singapore's consumer price inflation basket. Brent crude prices have plunged more than 50 per cent since August, trading around US$50 presently and major banks expect the oil to close out the year at that level.

Core inflation, a measure that excludes the price of housing and private road transport, is MAS' main target variable for monetary policy and is expected to average between 2-3 per cent this year, according to official forecasts.

"Given the 50 per cent annual plunge in oil, core inflation should fall to under 1 per cent on year by April. This we believe will open up room for the Monetary Authority of Singapore (MAS) to ease policy," Deutsche Bank was quoted as saying.

"Singapore is one of the few countries that include energy prices in her measure of core inflation, given reliance on imported energy and the direct impact of foreign exchange policy on imported prices. The dramatic decline in oil prices should therefore be considered an important input to policy here," Deutsche Bank added.

But not all analysts think MAS will loosen monetary policy so soon.

"Even with core inflation below official targets, there's no way we see MAS easing policy," Nizam Idris, head of strategy, fixed income and currencies at Macquarie, told CNBC. "Core inflation would have fall close to zero or even below that for the MAS to act. 1 or 1.5 per cent is not a significant enough level."

He expects the Singapore dollar to resume its upward trend towards the second half of the year, with a year-end target of $1.35.