Haven buying of the Singdollar amid global market turmoil has pushed a gauge of its strength to unprecedented levels, putting pressure on the city's central bank to do more to support the economy.
The Monetary Authority of Singapore's (MAS') trade-weighted measure of the currency hit a record high after Britain voted on June 23 to exit the European Union. It has reversed losses incurred after the MAS surprised markets by moving to a neutral policy of zero per cent appreciation in April.
That is prompting ABN Amro Bank, Royal Bank of Scotland and Nomura to predict more easing. The next review is due in October.
While Singapore's top credit rating and current account surplus are luring money, along with nations such as Japan and South Korea, the country's economy is sputtering.
Gross domestic product barely grew in the first quarter from the previous three months and the Government predicts non-oil exports will shrink this year.
Consumer prices have been declining since November 2014, and retail sales, excluding cars, fell in the three months through April.
"The risk of MAS easing in October has increased," said senior currency strategist Roy Teo at ABN Amro. "Global GDP will be lower, and this will have repercussions on Singapore's growth. The Singdollar strength against currencies of Singapore's main trading partners poses a strong downside risk to export and inflation forecasts."
At midday yesterday, the Singapore dollar had advanced against 11 of its 16 major peers since the Brexit result, with the biggest gain of about 14 per cent against the British pound and 4 per cent against the Swedish krona.
It lost 6.2 per cent against the Japanese yen and 1 per cent versus the New Zealand dollar.
April's move was the MAS' second unexpected decision in less than 16 months, following an emergency policy change in January last year to combat the threat of deflation. The last time MAS shifted its currency policy to zero appreciation was in October 2008, when the economy was in a recession.
The authority guides the local dollar against an undisclosed basket of Singapore's trade partners and competitors. It intervenes in the market to keep the exchange rate within an unspecified band and changes the slope, width and centre of that band when it wants to adjust the pace of appreciation or depreciation of the currency. Nomura, ABN Amro and RBS expect MAS to lower the mid-point of the band.
Nomura on June 24 cut its 2016 growth estimate for Asia to 5.6 per cent from 5.9 per cent, saying Brexit's global impact should not be underestimated, given the UK's position as a financial hub, and the risk of more countries leaving the EU. The Singapore and Hong Kong economies will be among the hardest hit, given their open nature, said Nomura's chief economist for Asia ex-Japan Rob Subbaraman.
The Singapore Government in May maintained its 2016 GDP growth forecast of 1 per cent to 3 per cent. That is less than the 3.5 per cent average expansion in the preceding five years. It projected a decline in non-oil domestic exports of 3 per cent to 5 per cent this year, compared with a February projection of a zero to 2 per cent increase. The MAS last month predicted inflation will average between minus 1 per cent and 0 per cent, compared with minus 0.5 per cent last year.
The local dollar has appreciated 5.1 per cent to 1.3496 against the greenback this year, the third-best performance in Asia. The currency will weaken to S$1.40 by end-2016, according to the median estimate of analysts in a Bloomberg survey.
Standard Chartered expects the MAS to maintain its current monetary policy setting in October, with its Singapore-based currency strategist Divya Devesh saying 2016 growth would need to drop below 1 per cent to trigger further easing.
Australia & New Zealand Banking Group estimates the Singapore dollar is trading on the strong side of the mid-point of MAS' policy band, which could complicate any potential easing.
BLOOMBERG
