Fx flash q2 gdp not an impediment to mas easing 14 july 2016

FX Flash

Group Economics Macro & Financial Markets Research

14 July 2016

Q2 GDP not an impediment to MAS easing in October Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com

 Singapore GDP grew 2.2% in 2016 Q2  S$NEER strength – MAS likely to ease in October  SGD likely to decline to 1.40 against the US dollar by end 2016

Singapore GDP grew 2.2% in 2016 Q2 Based on advance estimates, the Singapore economy grew 2.2% yoy in the second quarter of 2016, slightly higher than 2.1% growth in the previous quarter. Growth in the service sector expanded at similar pace of 1.7%yoy, while the construction sector slowed from 4.5% to 2.7%yoy. On the other hand, the manufacturing sector rebounded from -0.5% to 0.8%yoy.

S$NEER strength – MAS likely to ease in October The S$NEER has strengthened by more than one percent since the MAS shifted from a modest pace of appreciation path to zero percent earlier this year in April. Based on our estimates, the S$NEER is trading at more than one percent above the centre of policy band. Against the Chinese yuan and Euro, the SGD has appreciated by more than three percent since April. Exports growth to China, Singapore’s largest export destination, has declined by more than ten percent yoy this year. Singapore’s exports and inflation outlook is likely to face more headwinds given the strength in the SGD and more subdued global growth outlook following the UK decision to leave the EU in June. We expect core inflation in Singapore to slow in June after some encouraging signs of recovery this year.

The last time the MAS re-centred the policy band lower was in April 2009 after shifting to a zero appreciation path in October 2008. The decision was made due to dissipating inflationary pressures and weak growth prospects for the Singapore economy in the midst of the global financial crisis. Though the domestic and global outlook currently is not as grim as during the 2008-09 period, we expect economic growth and core inflationary pressures in Singapore to slow in the second half of this year. Hence there is a case for the MAS to lower the centre of the policy band later this year in October as the average level of the S$NEER since April has been more than one percent stronger than compared to the six months prior to April. The width of the policy band is likely to remain unchanged as the volatility in the SGD has remained within reasonable range. In our view, the MAS is

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FX Flash - Q2 GDP not an impediment to MAS easing in October - 14 July 2016

unlikely to shift to a depreciation path as exports and inflation are still expected to gradually improve in 2017.

Strong S$NEER a headwind to inflation outlook %

S$NEER at stronger half of policy band

Reverse scale %

7 6 5 4 3 2 1 0 -1 Jan-10

-1

127

0

125

1

123

2

121

3 4 Apr-11

Jul-12

S$NEER YoY% (lhs)

Oct-13

Jan-15

Index level

Apr-16

Core CPI YoY% (rhs)

Source: MAS, ABN AMRO

119 117 Jan-13 S$NEER

Jan-14 Midpoint

Jan-15

Jan-16

Lower band

Upper band

Source: ABN AMRO

Implications on SGD After the MAS lowered the centre of S$NEER policy band in April 2009, the SGD appreciated against the US dollar (USD). This is mainly due to weakness in the USD as the Fed embarked on powerful monetary stimulus after the global financial crisis. In our view, the weakness in the US dollar since the beginning of this year has probably run its course. Financial markets have priced out rate hikes in the US this year. CFTC data also show that non-commercial net long USD futures positions are relatively light. Hence more disappointment on US data is needed for the USD to decline further. The MAS is likely to step up their currency intervention activities to weaken the SGD.. In conclusion, we expect the SGD to decline to 1.40 against the US dollar by the end of this year.

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FX Flash - Q2 GDP not an impediment to MAS easing in October - 14 July 2016

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FX Flash - Q2 GDP not an impediment to MAS easing in October - 14 July 2016