No heavy intervention to support SGD: MAS

The Monetary Authority of Singapore (MAS) on Tuesday rejected as incorrect certain reports which suggested it had been intervening heavily in the market to support Singapore's currency.

"These reports had erroneously cited the fall in Singapore's official foreign reserves (OFR) and MAS' FX swaps since mid-2014 as an indication of heavy intervention by MAS to support the Singapore Dollar Nominal Effective Exchange Rate (S$NEER)," it said in a statement.

The decline in the US dollar (USD) value of the OFR in the last nine months till end-March 2015 was due to currency translation effects arising from the broadbased appreciation of the USD against the other major currencies in the OFR, it said.

The stock of FX swaps declined as MAS has relied more on MAS bills in its money market operations, and most of the proceeds from the maturing swaps were transferred to the government for management by GIC over a longer investment horizon, it said.

"This is hence a transfer of assets, not a reduction in Singapore's overall reserves," MAS said.

The Singapore dollar (SGD) has been one of the weakest Asian currencies as speculators had been shorting it, betting that the MAS would weaken it further at Tuesday's policy setting review. After falling about 5 per cent to the year's low of S$1.39 against the US dollar on March 18, the SGD began recovering following the dovish statement on interest rate hikes from the US Federal Reserve.

And after the MAS left its policy unchanged on Tuesday, the SGD rallied to S$1.36 from S$1.37. At S$1.36, the SGD is down about 3 per cent from the beginning of the year when it was at S$1.32.

"The rally is due to the unwinding of the (short) bets," said Leslie Tang, a Maybank analyst.

Singapore's OFR declined by US$29 billion from June 2014 to US$249 billion as at end-March 2015, the MAS said.

This came after an increase of US$105 billion over the preceding five years.

"Contrary to some reports, the recent decline was due to currency translation effects, rather than MAS' intervention operations," it said.

It reflected the sharp appreciation of the USD against the other major foreign currencies in the OFR.

"In a well-diversified portfolio, currency translation effects are inevitable, but not persistent or pronounced over the longer term."

MAS invests the OFR in a portfolio that is well-diversified by assets and currencies. About three-quarters of the OFR are denominated in the major G-4 currencies, ie, USD, euro, British pound and Japanese yen, with no single currency allocation making up more than one-third of the composition.

On FX swaps, MAS said it is one of the money market instruments that MAS uses to manage liquidity in the banking system.

"A substantial amount of FX swaps was accumulated by MAS during 2009-2011 when there were strong capital inflows to Singapore amid exceptional monetary easing in the major advanced economies," it said.

Over the period June 2014 to March 2015, the stock of FX swaps fell by US$24 billion to US$34 billion. MAS has allowed its FX swaps to mature as it increased its reliance on MAS bills as a money market instrument.

"Most of the proceeds from the maturing FX swaps were in excess of what MAS needed in the OFR to maintain confidence in the Singapore dollar, and hence were transferred to the government for management by GIC over a longer investment horizon."

Analysts said that the current SGD rally is temporary.

"It's temporary relief, there's no change to the USD strengthening story," said Mr Tang. Maybank is forecasting the SGD to weaken to S$1.39 by end of the third quarter but begin recovering to S$1.37 at the end of the year as a stronger US economy will help exporters in the region.

UBS thinks the SGD recovery will take longer.

"With today's MAS announcement being in line with our expectations, we keep our USD-SGD forecasts unchanged at S$1.40 (over three and six months) and S$1.38 (over 12 months)," said Tan Teck Leng, FX strategist, UBS Wealth Management.

"With the Fed still poised to hike rates later this year, we believe the USD will gain renewed momentum when the Fed shifts towards a more hawkish tone in the coming months," said Mr Tan.

This article was first published on April 15, 2015.
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