Singapore swap offer rate still slipping as greenback pauses

SINGAPORE - A key interest rate, the three-month swap offer rate (SOR), continues to slide as the US dollar takes a breather. The three-month SOR was quoted at 1.25544 per cent on Feb 1, down 0.06670 percentage point from Jan 30.

It has plunged some 30 per cent from 1.76235 per cent on Jan 13 and is now a whisker away from the other benchmark interest rate, the three-month Singapore interbank offered rate (Sibor). The three-month Sibor is down a pinch at 1.24270 per cent, from the recent high of 1.2540 per cent on Jan 19.

Commercial loans typically are pegged to SOR while home loans are linked to Sibor. The last time the two benchmarks converged was in October when the Singapore dollar rallied to S$1.38 from S$1.43.

"SOR has fallen because of the decline in the USD/SGD since mid-Jan," said Saktiandi Supaat, head of FX research at Maybank Singapore.

The Singdollar has recovered to S$1.4238 from S$1.4408 on Jan 15 as traders speculate that the US Federal Reserve might turn dovish in the light of wild swings in oil prices and stock markets in the past few weeks.

Fed chair Janet Yellen in a statement last week hinted that the Fed would not be as aggressive in hiking rates as originally planned. The Fed raised rates for the first time in nearly a decade on Dec 16, and subsequently the expectation was for four hikes this year. Since then, some are betting that the Fed may raise interest rates only two times this year.

"The SOR tends to be volatile but, over the longer term, Sibors and SORs should trade fairly close together. We are finally seeing a convergence of the Sibor and the SOR as FX pressures on the SGD ease," said Eugene Leow, DBS Bank economist.

"With USD strength wavering of late as the market speculates on a Fed pause, Asian currencies including the SGD have benefited. This comes despite volatility in global equity markets," said Mr Leow. Under these conditions, there are some downward pressures on Sibors and SORs, he said.

Mr Leow said that the local interest rates would track the Fed's moves. "Short-term fluctuations aside, the bias to SGD rates would depend on whether Fed normalisation is still on track over the coming quarters," he said.

It seems that the only certainty is to expect more volatility this year.

"A lot of yo-yo this year for sure," said Mr Supaat on market reactions to central banks' cooling measures versus the Fed's less aggressive to stay on the course tightening.

The Bank of Japan last week surprised with a negative interest rate move. Victor Yong, United Overseas Bank rate strategist said that the BOJ move gave fresh impetus to the SOR consolidation process that was already underway, he said.

"The recent weakness in SOR should be viewed in the context of a corrective phase within a longer upward trend," he said.

As for the Singdollar, "it is important to note that the Singapore dollar will likely continue to be impacted by the challenging economic growth outlook, both domestically and externally, as well as from monetary policies across the region that are inclined towards easing".

This article was first published on February 3, 2016.
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