SINGAPORE. SGD Appreciation: Surely But Slowly

Transcription

1 SGD Appreciation: Surely But Slowly QUARTERLY GLOBAL OUTLOOK - Q SINGAPORE Summary n Asian currencies (including SGD) will continue its second leg of USD correction, although the pace will again be dependent on the extent of RMB appreciation. After appreciation of 8% this year, we expect USD/SGD at 1.50, possibly 1.48 by end n With BNM appearing more willing to tolerate MYR appreciation, it would justify further SGD appreciation into 2007, without any significant adjustment in the SGD NEER. Note that following the recent MYR appreciation, along with other currencies, SGD NEER has actually depreciated some 0.6%. n Any convergence of the RMB towards the HKD is likely to result in more talk of HKD delinking with the greenback. This, if anything, will also mean more SGD strength - again, as a proxy play. We expect USD/RMB to converge with the lower end of USD/HKD band of 7.75 sometime in mid-1q n Singapore economy is well anchored to achieve growth of 5.2% in 2007, well within the govt's growth target of 4-6%. This is nonetheless an impressive figure given the high basis effect from This, along with regional strength and renewed USD weakness imply that SGD NEER will continue to hug the policy band in After hovering around since May 2006, USD/SGD fell to 9-year low of early Dec, triggered by renewed USD majors' weakness and USD/RMB breaking the critical 7.85-level. Other Asian currencies were also catching up, with THB at as of 18 Dec (strongest level since Oct 1997) and MYR appreciating 5.1% over the past month. Indeed, struggling to cope with the extended inflows, BoT has implemented further FX restrictions. Into 2007, our call is for further USD weakness, especially when the Fed begins its easing cycle late 1H Meanwhile, Asian currencies (including SGD) will continue its second Foreign Investors have Turned Net-sellers of Thai Equity 70% Since Jan 2002 Year-to-date Expected adjustment in % 50% 40% 30% 20% 10% 0% NZD AUD EUR GBP KRW CAD THB SGD IDR JPY TWD MYR RMB HKD 1

2 SINGAPORE leg of USD correction, although the pace will again be dependent on the extent of RMB appreciation. In all, after appreciation of 8% this year, we expect USD/SGD at 1.50, possibly 1.48 by end Foreign Investors have Turned Net-sellers of Thai Equity Expected adjustment in % 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% AUD JPY IDR EUR NZD SGD MYR RMB KRW THB TWD GBP CAD HKD Finally, Some MYR Strength Accounting for about 18% of our in-house SGD NEER basket, the MYR is finally catching up with the rest of the Asian currencies. However, as compared to Jan 2002, the MYR is only up a meager 6.7% -- with most of the appreciation undertaken over the past month. This is as compared to 19.1% on THB, and 16.9% on SGD. Even TWD has appreciated 7.6%, and 13% on IDR. Nonetheless, with BNM appearing more willing to tolerate MYR appreciation, it would justify further SGD appreciation into 2007, without any significant adjustment in the SGD NEER. Note that following the recent MYR appreciation, along with other currencies, SGD NEER has actually depreciated some 0.6%. MYR Playing Catch up Towards the Year End MYR NEER USD/MYR (inverted, RHS) Source: Bloomberg Jan 06 Feb 06 Mar 06 Apr 06 May 06 Jun 06 Jul 06 Aug 06 Sep 06 Oct 06 Dec Updates on RMB Policy Ahead of US Treasury Secretary Henry Paulson and Fed chairman Bernanke's visit in Dec 2006, Beijing reiterated its commitment to greater capital convertibility, saying that it would 2

3 QUARTERLY GLOBAL OUTLOOK - Q SINGAPORE improve FX mechanism in Indeed, with the RMB crossing 7.85 (a level that most market participants thought Beijing is unlikely to let go this year), suggestion is that PBoC could follow up with a band-widening sooner than later. International pressure is particularly pressing following China's FX reserves crossing the $1trn mark, widely interpreted as the result of an undervalue currency. In all, our estimation is for another 4-5% appreciation in 2007, with USD/RMB at 7.47 end As the most freely convertible FX in the region, SGD will remain the main proxy play for RMB development. RMB Spot vs. 12M NDF: Pricing in Moderate Strengthening CNY Curnc CCN+12M Curnc Source: Bloomberg USD/RMB Jan 06 Mar 06 May 06 Jul 06 Sep 06 Nov 06 Also, Keep Watch on the HKD HKD currency board system is again brought under question, as RMB converges with the only peg currency in the region. Suggestion is that with HK increasingly linked to the mainland, at some point, the HKD will be pegged to the RMB. Not an impossible outcome, however, it would have to wait till the RMB is fully convertible - as the HKD is a fully convertible currency. Also, the current economic structure, HK is largely financial and retail based. Thus, there is less justification a flexible FX regime as compared to the manufacturing based mainland. Indeed, HK has very much relinquished its manufacturing to the mainland over the last two decades. Against some 25% in the early 80s, manufacturing now accounts for less than 5% of HK's GDP. Nonetheless, any convergence HKD 1Y FWD Points: Uncertainty Causing Divergence HKD 1Y FWD Points Source: Bloomberg pips

4 SINGAPORE of the RMB towards the HKD is likely to result in more talk of HKD de-linking with the greenback. This, if anything, will also mean more SGD strength - again, as a proxy play. We expect USD/RMB to coverage with the lower end of USD/HKD band of 7.75 sometime in mid-1q Singapore: Economy Buzzing with Optimism With growth of 8.6%y/y for the first nine months of 2006, Singapore govt has revised its full-yr growth forecast to % ( % previously). However, the bigger question is outlook for For now, consensus is the current business cycle (started in 2002) is getting tired, and that we should see some moderation in The issue is to what extent? So far, the market is fairly divided, as reflected in the spilt Fed interest rate outlook end One reason is perhaps the resilience of the financial markets, and suggestion that we are in an entirely new environment. After all, this is the first turning point since the Asian crisis of 97, internet bubble burst in 2001, and China and India integrating with the global environment in a pronounced manner. In all, our view is some growth moderation, but not a drastic slowdown. For Asian (including Singapore), there are offsetting growth engines, namely demand from China, India, other Asian economies, as well as the flush liquidity conditions supporting asset prices. Domestically, the on-going efforts to restructure the Singapore economy are finally bearing fruits. Employment creation was 123,100 between Jan-Sep 2006, surpassing 113,300 jobs created for the whole of With the integrated resorts construction activities due to kick in early 2007, there appears to a buzz of optimism locally. This was reflected in the queues at property launches, not seen since prior to the Asian crisis. Indeed, we are finally seeing black for the construction sector, up 2.3%y/y in 3Q This was the first consecutive quarters of expansion since 3Q-01. Adding in the new commercial developments along Orchard road, and major construction investment in petrochemical production by oil majors, estimation is that construction sector could achieve growth of 6.2% in As a whole, Singapore economy is well anchored to achieve growth of 5.2% in 2007, well within the govt's growth target of 4-6%. This is nonetheless an impressive figure given the high basis effect from Not Much Inflationary Threat Following a 14-month low of 0.4%y/y in September, price inflation in Singapore came in lower than expected, unchanged at 0.4% in October (Rtrs:0.2% & UOB: 0.6%). Inflation Singapore: Relative Benign Inflation Trajectory Core Inflation Headline Inflation UOB s forecast Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan

5 QUARTERLY GLOBAL OUTLOOK - Q SINGAPORE for the first ten months of 2006 averaged 1%y/y. For the full-yr, we expect inflation to come in at 1.1%, well within MAS forecast range of 1-2%. Into 2007, we expecting headline inflation of 1.4%, also within the MAS target of %. In our view, the recent announcement for GST hikes of 2% points will be implemented only in Jan Overall, we expect MAS to maintain its current 'modest and gradual SGD appreciation' policy stance throughout SGD NEER - Will Continue to Hug Policy Band As a proxy for regional play, SGD NEER has repeatedly challenged the MAS threshold - based on our in-house NEER model. This was also reflected in the FX reserves accumulation of about US$15bn since Jan 2006, bringing the total FX reserves to US$135.3bn to date. While the recent regional strength and renewed USD weakness have pushed SGD NEER well within the policy band, our reading is that SGD NEER will continue to hug the policy band in This is especially in light of more RMB appreciation, as well as convergence with HKD, and Malaysia's increasing willingness to tolerate MYR strength. UOB Estimation of SGD NEER (daily averages) USD/SGD (daily avg) Lower end % Upper end % New band -- lower end New band -- upper end Central tendency, UOB Jan 03 Aug 03 Apr 04 Nov 04 Jul 05 Apr 06 Nov UOB Estimation of SGD NEER (daily averages) 160 SGD NEER Lower end Mid pt of est policy band Upper end, UOB Jan 00 Feb 01 Mar 02 Apr 03 Apr 04 Jun 05 Jul

6 SINGAPORE SGD Interest Rate Outlook In line with the pause in Fed tightening cycle, SGD 2- and 10-yr IRS yields have eased some 59bps and 67bps to 3.245% and 3.29%, respectively. However, unless 2- and 10-yr Treasuries yields ease further, we could be close to a temporary of SGD IRS yields. Also, adjustment on short-end SGD SIBOR 3-mth has been marginal, from % to 3.375%, which should help support SGD IRS. In terms of the yield curve, we should at some point see a steepening of the SGD yield curve - probably when it becomes clear that the Fed will cut rates. Global Interest Rates Appear to Have Peaked yr SGD IRS Fed funds (RHS) 10-yr SGD IRS Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug Global Interest Rates Appear to Have Peaked yr Treasuries Fed funds (RHS) 10-yr Treasuries Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug