SINGAPORE (BLOOMBERG) - The Singapore dollar looks set to move up the regional currency rankings in the next quarter, with rising core inflation expected to spur further policy tightening from the Republic's central bank in April.
The currency should be better positioned to weather higher US yields than most Asian peers.
While other regional central banks remain content with accommodative policy, the Monetary Authority of Singapore (MAS) appears set to change its exchange-rate band next month to allow for further local dollar appreciation.
Further MAS policy tightening bodes well for the Singapore dollar, not only against regional currencies, but also versus the greenback.
Mr Jeff Ng, forex strategist at MUFG Bank in Singapore, sees the local currency rising to 1.33 against the United States dollar by year end. It traded at around 1.357 last Friday (March 18).
The Singapore dollar has weakened 0.5 per cent against the US dollar this year, making it Asia's fifth-best performer.
The reason further MAS action is expected, even after "slightly" tightening policy in January, is that Singapore's core inflation is still accelerating.
It rose to 2.4 per cent on a year-on-year basis in January, the highest since 2012. Data on Wednesday is expected to show it was 2.5 per cent in February.
Unlike other central banks that target interest rates, MAS manages inflation and growth by guiding the export-dependent economy's currency against those of its major trading partners.
It focuses on the level of the Singapore dollar's nominal effective exchange rate, often referred to as S$Neer, which it allows to move within a policy band.
While monetary tightening typically involves steepening the slope of appreciation within an undisclosed policy band, it can also include widening or recentering the band.
Barclays Bank strategists think that next month's decision may involve all three.
This could lead to noticeable Singapore dollar appreciation against the country's main trading partners, many of which are Asian.
"We expect the S$Neer to gain around 3 per cent from current levels into year end," a team including senior regional Asean economist Brian Tan wrote in a client note dated March 15.
They predict S$Neer strength to be front-loaded and for it to climb 30 to 40 basis points to near the top of the band in the run-up to the April policy review.
They also believe "the S$Neer is likely to track the expected re-centring move in April and gain another 150 basis points" if the MAS decision is as they forecast.
Dr Chua Hak Bin, regional co-head of Macro Research at Maybank Investment Banking Group, said that in allowing the Singapore dollar to appreciate, the central bank must carefully balance between keeping local prices under control and ensuring Singapore exports remain competitive.
This is important because Singapore’s growth is also slowing.
CIMB Private Banking economist Song Seng Wun noted that, with prices rising fast “due to a confluence of factors” which include lockdowns in China and the crisis in Ukraine, “the MAS could recenter the band to raise the value of the Singapore dollar, but this still may not fully contain inflation”.