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Saturday, 15 November 2008

Singapore Dollar to weaken against the US dollar?

I read with interest the recent prediction by Morgan Stanley that Singapore Dollars will depreciate against the US dollar to $1.80 by next year. I decided to explore this prediction further, fundamentally.

Monetary Authority of Singapore Policy (MAS) on Singapore Dollar (SGD)

A check with policy statement of MAS's website shows that MAS manages SGD exchange rate. The following is quoted from the website:

... The objective of Singapore's exchange rate policy has always been to promote sustained and non-inflationary growth for the Singapore economy. Since 1981, monetary policy in Singapore has been centered on the management of the exchange rate. MAS manages the Singapore dollar against a basket of currencies of Singapore's main trading partners and competitors.

The trade-weighted exchange rate is allowed to fluctuate within a policy band, and where necessary, MAS conducts direct interventions in the foreign exchange market to maintain the exchange rate within this band. The exchange rate policy path and the band are regularly reviewed to ensure that they remain consistent with underlying economic conditions. ...

In order words, MAS manages SGD exchange rate directly and regularly review the strength of SGD against major trading partners for sustained non-inflationary economic growth for Singapore.

In fact, MAS reviews the exchange rate policy twice a year and publish them on its website.

Trade-weighted Exchange Rate

It is explicitly mentioned in the policy that the exchange rate is trade weighted. MAS neither reveal the exact currencies in its basket of currencies nor their weightage, thus I decided to compile a list of major trading partners of Singapore and estimate how the various currencies' will affect SGD.

A few points to note on compiling the above table:
  1. Other than the interest rate which is current, the rest of the data are full year results for 2007.
  2. Estimated trading volume are estimated by totaling import and export to these economies. These data are taken from Statistics Singapore.
  3. Due to the difficulty (or rather, my laziness) in compiling data for the entire European Union (EU), I estimated EU's data with France and Germany, two large entities in EU that are somewhat representative.
Major Conclusions that can be drawn from the table above

1. Simplistic trade weighted equation?

In the simplest case:

SGD = 0.18 x MYR + 0.15 x RENMINBI + 0.145 x USD + ...

If SGD exchange rate is derived simplistically as above, SGD's strength (or weakness) against any single currency will just depend on that currency against all others in the basket. In other words, SGD should not fluctuate much against major currencies. If so, the recent USD devaluation is less about the strengthening of SGD, but more of a weakening of USD against all other currencies.

2. Strengths of currencies in the basket

Assuming most (if not all) of the currencies in the table are found in the basket and my simplistic trade weighted formula approximates the SGD exchange rate, then the strength (or weakness) of SGD will very much depend on how well these currencies perform.

While many factors affect the strength of a currency, important ones include economic growth, trade balance, current current balance, central bank rates etc. Prolonged current account deficit can be sustained so long as influx of capital continues, either due to high central bank interest rates (high yield attracts capital) or high demand of goods and services (including commodities).

Australia is a case in point. Its account balance is highly negative (even higher than United States in terms of percentage of GDP) but it has sustained so for a relatively long time due to its high interest rate and huge demand for its resources. With the onslaught of global financial crisis (sparking a cut in its interest rate) and ensuing drop in demand of its raw resources, Australian dollars plunge against major currencies.

Looking at the current central bank interest rate and their current account balance of these economies, those with huge account deficit, high interest rate or both are most prone to weaken. These include, United States, Australia and United Kingdom. Together, these accounted for 21.3% of 'my' estimated basket. If these were to weaken against the rest of the 78.7% of the basket, then it is more probable that SGD will strengthen against them.


Though being a major and important trading partner, Singapore don't just trade with United States alone. The basket of currencies is meant to price SGD to sustain Singapore's economic growth. Since US borrow in USD (selling US dominated bonds), they can and are already printing USD as much as they need, it will be quite surprising if USD does not depreciate against major currencies and consequenty against SGD. Unless MAS intervened (directly or indirectly with a policy change) for the sake of Singapore export oriented economy, it is more likely SGD will appreciate against USD.

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Anonymous Anonymous said...

the exhange rate now is S$1.53/USD actually wanted to put my money in a usd account....since reading ur blog....i will think otherwise since sgd wil appreciate against sgd...right?
i know nuts...advice?

2 December 2008 at 21:12  
Blogger Market Uncle said...

This article is just my point of view and any forecast, to be frank, is as good as a wild guess.

As the current credit crunch rages on and imminent (real) recession approaches, no one knows for sure what the various gov. could do that can change the entire forex game play.

As far as investment is concerned (e.g. opening a USD account), I think the risk is too high to justify the returns.

2 December 2008 at 22:44  
Anonymous Anonymous said...

i listened to Morgan and bought into USD. Now I am panicking! Instead of weakening the Sing $ is strengthening and it is 1.43 something this morning. I bought at 1.50. should i cut loss or wait out? what is it drops to 1.33 again? Please advise.

31 December 2008 at 08:12  
Blogger Market Uncle said...

I'm not in the position to advice but can voice my opinion here.

SGD is managed against a basket of undisclosed currencies but Singapore's major trading partners are a guide.

So whether SGD will further appreciate (or even depreciate) against the USD will depend very much on how most partners fair against USD.

If most appreciate against the USD, then SGD should also appreciate against USD and vice versa.

Singapore import almost everything beside water which we just became self sufficient. So in order to achieve a stable, sustainable and non-inflationary growth, SGD have to be managed against the basket. Whether to have a slow or fast appreciation (and now stagnates) against the basket, will depend MAS which depends on economic concerns.

Hence for your case, whether to cut loss, hold or wait and see depends very much on your investment horizon, i.e. short term (months) or long term (years). No crisis last forever, if you have the capacity to hold long enough, I'm quite USD will strengthen against SGD ultimately... on sheer size of its economy.

By this argument... then 'eventually' Chinese Renminbi, India Rupee and Brazil Real will also ultimately be stronger than SGD.

31 December 2008 at 15:34  
Anonymous Anonymous said...

heard the sing $ follows the renminbi. so many buy S$ as a substitute fro RMB. How will this affect the USD/SGD uncle?

2 January 2009 at 12:22  
Blogger Market Uncle said...

Pardon my ignorance, I'm not aware that SGD follows Renminbi.

2 January 2009 at 20:16  
Anonymous Anonymous said...

You are so right market uncle! The USD is now so weak at S$1.45 that I am about to faint. Those analysts who predicted $1.58 by June 2009 are not worth their salt compared to uncle. What am I to do with my sizable USD now? sell? or hope SGD will weaken cos our exports are being killed by the strong SGD? uncle how? i bought in at S$1.50

22 May 2009 at 23:15  
Blogger Market Uncle said...

I posted this article sometime in Nov 08. Things had actually changed somewhat now.

I've update this with another blog entry sometime in Feb 09:

My comment is this, I'd think the forex should or already hit the bottom. The volatility will be there but within so much interest rate cut and money printing by so many government to save their financial systems, I'd think the overall devaluation of other currencies (not just USD) to SGD should have be more muted going forward.

However, I'm in no position to make any prediction, nor give any advice. So you'll just have to analysis the macroeconomics and ask yourself whether you have the holding power to ride out the current devaluation.

23 May 2009 at 00:13  
Anonymous Penny Stock Newsletter said...

This whole eoro thing just goes on and on' their does not seem to be an end in sight. Their have been attempts to resolve the debt issues but none of them are working. Now their is another plan but it most likly will fail.

12 December 2011 at 14:22  

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