2-1-2024 (SINGAPORE) The Singapore dollar has emerged as the top-performing currency among Asian currencies for two consecutive years, and its prospects for a third year in a row depend on the decisions made by the Monetary Authority of Singapore (MAS).
According to a recent Bloomberg report on Tuesday (January 2), the Singapore dollar is expected to appreciate by 1.5% in 2023. This projection is based on the MAS’s decision to maintain the pace of currency appreciation during its policy meetings in April and October 2023 as a measure to combat inflation. Economists anticipate that policymakers will continue with this approach in the current year, and some even predict the possibility of further tightening if inflation proves to be challenging to control.
“While we anticipate that the MAS will refrain from adjusting the foreign exchange policy until 2025, the likelihood of a 50 basis point increase in the slope has risen,” stated Chen Guangsheng, Senior Regional Economist at Barclays Bank, in a recent client note. He also noted that core inflation has been persistently higher than historical averages.
Unlike many countries that manage their economies through interest rate adjustments, the Monetary Authority of Singapore employs a different approach. It formulates the slope, width, and midpoint of the Singapore dollar nominal effective exchange rate (S$NEER) policy range to manage the economy. The S$NEER measures the exchange rate of the Singapore dollar against a basket of currencies representing Singapore’s major trading partners.
Although Singapore’s core inflation rate has been decreasing since the beginning of 2023, it remains considerably higher than the five-year average of 2%. This provides a rationale for the MAS to maintain the strength of the Singapore dollar. Additionally, the robustness of Singapore’s economy contributes to this stance. Recent data released indicates that Singapore’s gross domestic product grew by 2.8% in the fourth quarter, surpassing economists’ median forecast of 1.8%.
However, Vishnu Varathan, Head of Economics and Strategy at Mizuho Bank in Singapore, pointed out that the S$NEER is already at the upper end of the policy range, limiting the potential for further outperformance of the Singapore dollar. He believes that the currency is more likely to perform at a moderate level.
In other monetary policy news, the Hong Kong Monetary Authority (HKMA) announced on Tuesday its decision to increase the frequency of its monetary policy reviews from twice a year to four times a year, starting in 2024. The HKMA will issue its first monetary policy statement for the year on January 29.
