Thursday's policy shift by the Monetary Authority of Singapore (MAS) to a zero per cent depreciation stance jolted the Singapore dollar, but the currency is still likely to be driven more by US Federal Reserve developments.
With the MAS policy statement out of the way, the Singapore dollar (SGD) and local interest rates will move as expected, weaker and higher respectively, as the US hikes rates again sometime later this year, say analysts.
Where the pundits differ is the number of rate hikes the Fed will make before the year is over.
Before Thursday's policy move by the MAS, the SGD had strengthened against the US dollar (USD) by almost 5 per cent to S$1.35 from the Jan 15 low of S$1.44. It plunged by a cent to S$1.36 after the policy statement was released.
Effectively, the SGD NEER (nominal effective exchange rate) has shifted back into the lower half of its new neutral band, said Philip Wee, DBS Bank senior currency strategist.
"In USD/SGD terms, this points to a S$1.35-1.38 range as of this morning. The outlook for the USD/SGD will, in the end, still be dictated by the USD's direction against its trade-weighted basket of currencies," said Mr Wee.
"Looking ahead, we will probably need to pay more attention to the Fed," he said.
The DXY (USD) Index bounced off its intra-day low of 93.627 on April 12 to 94.744 on Wednesday. At its low on Wednesday, the DXY effectively returned all of the appreciation seen in October-November 2015.
Mr Wee noted that two Fed presidents - John Williams (San Francisco) and Jeffrey Lacker (Richmond) - suggested on Wednesday that the market may be too dovish in its Fed hike expectations.
Both see last year's hike in December as more representative of the Fed's intention to normalise monetary policy. Mr Williams does not expect a lot of volatility from Fed hikes, suggesting fewer concerns about global risks.
Mr Lacker also cited less concern on the effect of a strong USD on US growth, said Mr Wee.
"Put simply, DXY needs to start moving back up from the floor of its 93-100 range for USD/SGD to rise above 1.40 again," he added.
The MAS's latest move is unlikely to have significant impact on the SGD, said a note by Maybank. "But it will add to SGD volatility and push domestic interest rates higher because it may signal the perception that MAS may continue to ease given the marginal easing move this time round."
"Nonetheless, given the easing bias and the signalling, we expect the market to revise some of its view based on the perception of possible further easing," it said.
Maybank is looking at USD/SGD to hit S$1.385 in Q4, while ABN Amro has a year-end USD/SGD forecast of S$1.40. Credit Suisse sees USD/SGD at S$1.40 in three months and S$1.43 in 12 months.
As for local interest rates, which had weaken considerably the past three months, analysts said the softness is over.
The three-month Singapore interbank offered rate (Sibor) used to price home loans had fallen to one per cent from 1.25 per cent on Jan 19. It was little changed on Thursday. The more volatile three-month swap offer rate (SOR), used for commercial loans, stood at 0.85 per cent on Wednesday, more than halved from the Jan 13 high of 1.76 per cent.
The MAS surprise easing does increase the probability that SORs may have seen their lows for the year, said a note by United Overseas Bank (UOB). UOB said that its Q4 forecast for the three-month Sibor and three-month SOR remains unchanged, at 1.50 per cent and 1.70 per cent, respectively.
Most of the downdraft in the Sibor and the SOR over the past few months was due to the weak USD trend as the market pushes back on Fed hike expectations, said Eugene Leow, DBS economist.
This downdraft on SGD rates appears to have dissipated with USD strength reasserting itself and the MAS shifting to neutral stance, he said.
"As the SGD weakens against the USD, some upward pressure on SGD rates have appeared. When the market refocuses on Fed hikes, USD strength could become more apparent and USD interest rates should rise," said Mr Leow.
DBS still has three Fed hikes pencilled in for the year, he added.
The current Sibor and SOR retracement is overdone since it was largely driven by the unwinding of the USD strength story from Q4 2015, said OCBC Bank economist Selena Ling.
OCBC's year-end three-month Sibor and SOR forecasts remain at 1.3 per cent and 1.35 per cent respectively, she said.
This article was first published on April 15, 2016.
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