Fx watch will the mas ease policy in october 28 september 16

FX Watch

Group Economics Macro & Financial Markets Research

28 September 2016

Will the MAS ease policy in October?

Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com

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MAS shifted from modest appreciation to neutral SGD policy in April 2016

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Economic growth forecast has since been revised lower; inflation subdued

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The MAS is likely to ease policy by shifting its policy band lower

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2016 year end USD/SGD forecast: 1.40

MAS shifted from modest appreciation to neutral SGD policy in April 2016 Earlier this year on 14 April 2016, the Monetary Authority of Singapore (MAS) shifted from a modest and gradual appreciation path to neutral given a slower economic growth and inflation outlook. The width of the policy band and the level at which it is centred was unchanged. Core inflation in 2016 was projected to come in within the lower half of 0.51.5% range. The Singapore economy was also forecast to expand at a modest pace of 13%.

Economic growth has since been revised lower; inflation subdued Since then, the central bank has lowered its economic growth projections this year to 12% despite the Singapore economy expanding 2% in the first half of this year. Core inflation is projected to average around 1% this year.

Strong S$NEER weighing on import and export prices Index level

Reverse scale S$NEER

115 110 105 100 95 90 85 80 75 Jan-08

Jan-10

Export price index (lhs)

Jan-12

Jan-14

Import price (lhs)

Jan-16 S$NEER (rhs)

Source: Singapore Department of Statistics, MAS, ABN AMRO

S$NEER 1% firmer from April-Sep 16 vs Oct 15-Apr 16 S$NEER Index level

105

127

110

125

115

123

120

121

125

119

130

117 Jan-13

Jan-14 S$NEER

Jan-15

Midpoint

Source: MAS, ABN AMRO

Insights.abnamro.nl/en

Lower band

Jan-16 Upper band

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FX Watch – Will the MAS ease in October? 28 September 2016

Will the MAS ease in October?

In our view, yes. The recovery in core inflation has stalled around 1% since May this year.

Core inflation needs to rise substantially to 1.3% from September to December in order for MAS core inflation forecast to materialise (January to August average core inflation is 0.8%). In our view this is ambitious given that domestic growth is projected to slow in the second half of this year. In addition, the strength in the S$NEER is weighing on both import and export prices. Indeed, the S$NEER is about 1% stronger on average since April this year compared to the preceding six months. This is due to the Chinese yuan and the US dollar underperforming against the Singapore dollar (SGD). Finally, the labor market has eased and wage growth is projected to slow in the coming months. The Ministry of Trade and Industry is expected to release advance estimates of third quarter economic performance between 10 to 14 October. The MAS is also expected to announce its monetary policy decision on the same day.

2016 year end forecast USD/SGD: 1.40 We have a non-market consensus view that the MAS is likely to shift its policy band lower by 0.5-1%. This is to signal that further strength in the SGD is unwelcomed. Currently the S$NEER is around the center of the policy band. The width of the policy band is likely to remain unchanged given that volatility in the SGD is not extreme. The appreciation path of the S$NEER is also expected to remain at zero percent. We expect a combination of slower economic growth in the coming months, a weaker Chinese yuan and firmer US dollar to weigh on the SGD. Our 2016 year end USD/SGD forecast is 1.40.

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FX Watch – Will the MAS ease in October? 28 September 2016

Find out more about Group Economics at: https://insights.abnamro.nl/en/

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FX Watch – Will the MAS ease in October? 28 September 2016