Bearish forecasts for the Singapore dollar are growing amid expectations that crude oil's recent tumble will result in looser monetary policy.
The Singapore dollar dropped more than 7 percent against the U.S. dollar over the past six months as the Federal Reserve brought its asset purchase program to an end and appears on course for further weakness given lower oil prices. Deutsche Bank believes it could weaken to S$1.40 this year, a level not seen since July 2010, while Standard Chartered expects it to hit S$1.37; the USD/SGD is currently trading at S$1.33.
Declining inflation will lend a dovish tilt to the central bank's policy bias this year amid cheaper oil prices, underpinning currency weakness, Deutsche Bank said in a recent report.
"Given the 50 percent annual plunge in oil, core inflation should fall to under 1 percent on year by April. This we believe will open up room for the Monetary Authority of Singapore (MAS) to ease policy," it said, referring to the country's central bank.
Energy and food items combined have a weighting of 27 percent in Singapore's consumer price inflation basket. Brent crude prices have plunged more than 50 percent since August, trading around $50 presently and major banks including Goldman Sachs expect the commodity to close out the year at that level.
Monetary policy in the Southeast Asian city state is based on a trade-weighted exchange rate that comprises a basket of currencies, called the Singapore Dollar Nominal Effective Exchange Rate (SGD NEER). Meanwhile, core inflation, a measure that excludes the price of accommodation and private road transport, is the main target variable for monetary policy and is expected to average between 2-3 percent this year, according to official forecasts.
"Singapore is one of the few countries that include energy prices in her measure of core inflation, given reliance on imported energy and the direct impact of foreign exchange policy on imported prices. The dramatic decline in oil prices should therefore be considered an important input to policy here," Deutsche Bank said.