The Singapore dollar's three-month winning streak is facing its stiffest test yet as global growth headwinds dim the outlook for further central bank tightening.
An above-consensus inflation report today would go a long way towards ensuring the currency's advance remains on track.
A gauge of the nominal effective exchange rate, which the Monetary Authority of Singapore (MAS) guides to conduct policy, is showing signs of weakness amid trade tensions and a slowdown in China.
On the flip side, strong domestic demand and resilient inflation are keeping alive wagers that the MAS will accelerate the pace of appreciation for a third straight time in April.
Unlike central banks that use interest rates to tackle inflation and growth, the MAS steers the Singapore dollar against a basket of its counterparts, adjusting the pace of appreciation (or the "slope"), the width of the target band and the level at which that band is centred.
Its decisions to tighten policy last year were spurred by rising inflation, underpinned by an improving labour market and robust economic expansion.
Singapore's leading index suggests growth will hold steady despite greater downside risks to the global economy. Resilient domestic demand will continue to put pressure on core inflation, which is at its highest since 2014. Should growth accelerate, there could be a greater pass-through of import and labour costs to consumers, the MAS and Trade and Industry Ministry said last month.
The MAS' April policy decision is still "live", economist Mohamed Faiz Nagutha at Bank of America Merrill Lynch wrote in a Feb 19 note to clients. It could surprise the market with a hawkish bias given core inflation at or above the historical average, he wrote.
Still, uncertainty over global growth has taken some wind out of the Singapore dollar's sails. The International Monetary Fund last month cut its forecast for the world economy for the second time in three months, warning that rising trade tensions could spell trouble.
The nominal effective exchange rate is estimated to be trading 1.4 per cent above the midpoint of the MAS' policy band, down from a high of 1.6 per cent in December, according to a Standard Chartered model. Versus the US dollar, the Singapore currency has weakened by about 0.4 per cent this month, sliding to 1.3511 at the close of trading last Friday.
Public-sector spending will offer little support to mitigate external risks, with a government report last week showing that the Budget's macroeconomic impact will likely be neutral this fiscal year.
Mr Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore, sees a 60 per cent chance that the MAS will tighten policy in April. "It's a binary risk," he said. "A pause after back-to-back tightening in 2018 admittedly makes for an increasingly compelling case."