Go long USDSGD
We recommend going long USDSGD (entry ref: 1.3482) as a tactical trade, targeting the March high of 1.3940, with a stop loss level at 1.3190 (current 200dma). The broad USD has regained strength over the past week, particularly after the latest higher-than-expected US inflation print and after Chairman Yellen reiterated the possibility of the Fed lifting interest rates towards the end of the year. Although Yellen said that the hiking cycle would likely be gradual and be highly data dependent, the US would likely still be the first major central bank to tighten policy. The EURUSD has resumed its fall after a brief bounce towards 1.15, while USDJPY has also broken above its year high of just above 122. Meanwhile, the USDSGD cross has broken out of its recent consolidation range of 1.3170-1.3400, after having fallen sharply since the 18 March FOMC meeting.
Although Asian currencies have a distinctly lower beta to the broad USD compared to other EM currencies, USDSGD stands out has having the highest beta to the DXY among Asian currencies (see Figure 1). We thus see USDSGD as one of the best candidates to express a strong USD view in the region, considering additionally that the low FX implied yields of the SGD makes it one of least costly EM Asian currencies to be long USD against (see Figure 2).
We see room for the SGD NEER to fall within its current policy band given that the NEER is currently trading close to the middle of the policy band, although we do not expect the MAS to ease policy in October unless the growth outlook deteriorates. Market sentiment on the SGD has turned less bearish since the MAS policy review (based on Reuters positioning survey; see Figure 3). Given the signalling from the MAS that the bar for easing is high (see Singapore: MAS holds, signalling comfort with growth outlook, 14 April 2015, and MAS explains sharp drop in foreign
reserves, 15 April 2015) and the rebound in oil prices since January, market discussion of further MAS easing has also largely ceased. We also think the build-up in short SGD positions before the April policy review has largely been unwound, judging from the SGD’s outperformance among Asian FX since 18 March.
As such, we think that market positioning on the SGD is now much lighter than before the policy meeting. It is possible that the market may turn more bearish on SGD should core inflation fall further in the near term, a possibility pointed out by our economists (see Singapore: Electricity tariff cuts drive core inflation to five-year low, 25 May 2015). Moreover, should there be a renewed fall in oil prices, which would exert downward pressure on core inflation, the SGD would likely underperform under such a scenario. Nevertheless, we see this as more of a tactical FX trade, and less of a “policy” trade.
The close above 1.3400 and the recent range highs add to our bullish conviction for USDSGD. We expect buying interest near 1.3190 to underpin a move higher in range. Our initial upside targets are in the 1.3640 area. Beyond there, we anticipate a move up towards the 1.3940 year-to-date high