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Singapore’s central bank likely won’t be turning hawkish any time soon

Leslie Shaffer

Singapore's economy may be perking up, but the central bank isn't likely to turn hawkish at this month's policy review, analysts said.

Khoon Goh, head of Asia research at ANZ, said in a note on Wednesday that the question wasn't really whether Singapore's central bank, the Monetary Authority of Singapore (MAS), would stick with its neutral stance – which was the consensus view – but whether it would keep the "extended period" wording on the policy.

Goh expected the MAS announcement on April 13, although he noted the date wasn't yet officially set.

If the "extended period" wording was dropped, Goh said that would be a hawkish signal, likely sending the Singapore dollar's nominal effective exchange rate (NEER) higher.
But he added that it was premature to expect that hawkish tilt.

"There is no doubt that Singapore's economic data has improved," Goh said, citing indicators including the consumer price index's (CPI) return to inflation after two years of deflation and improvements in the purchasing managers' index (PMI).

The Nikkei Singapore PMI, released Wednesday, picked up to 52.2 in March, a four-month high, up from 51.4 in February, indicating stronger improvement in the private sector. Levels above 50 indicate expansion and levels below indicate contraction.

But Goh added, "we need much stronger improvement before MAS will contemplate exiting the neutral stance," noting that the labor market remained weak.

Goh expected that the market was pricing in tightening prematurely, with the Singapore dollar NEER likely to weaken as the MAS review quashed hawkish expectations.

He recommended buying the U.S. dollar/Singapore dollar pair at 1.3979, with a 1.42 target and a stop-loss at 1.3880. The greenback was fetching 1.3981 Singapore dollars around mid-day Wednesday.

That compares with the pair's high of 1.4545 touched in early January, rising from around 1.36 before the MAS' October policy review, when it said it would maintain the neutral stance for an extended period.

The MAS uses the exchange rate, rather than interest rates, to set monetary policy because of the city-state's small size and open economy.

The city-state's central bank, which has official policy-setting meetings just twice a year, sets its monetary policy by adjusting an undisclosed trading band for the currency based on a basket of currencies weighted to reflect trade levels with the city-state.

The MAS may intervene if the currency moves outside its band; it was suspected of stepping into the market late last year as the U.S. dollar climbed over 1.45 Singapore dollars.

Selena Ling, head of treasury research and strategy at OCBC Bank, also expected the MAS to maintain a neutral policy.

"Both growth-inflation dynamics remain within their comfort zone and any upside (or downside) risks to their forecasts are muted for the foreseeable future," she said in a note late Tuesday.

Additionally, she noted that the Singapore dollar NEER was "bearing the brunt" of markets unwinding the Trump reflation trade; that trade had pushed the U.S. dollar higher before market concerns about U.S. President Donald

Trump's apparent inability to push his agenda through Congress erased the greenback's gains.

Ling also noted that markets don't appear willing to fully price in another two rate hikes from the U.S. Federal Reserve, likely keeping Singapore rates subdued as well.

Pricing in those increases would likely push the dollar higher and the Singapore dollar down. Interest rates in Singapore tend to follow the Fed.

Others also noted that Singapore's economic pick-up wasn't entirely rosy.

Bernard Aw, an economist at IHS Markit, which compiled the Nikkei Singapore PMI, pointed to "worrying trends" in the latest data.

"March saw a sharp increase in cost pressures, the steepest in over three-and-a-half years, as wage inflation gained momentum," Aw said in a statement accompanying the data. "At the same time, prices charged for Singaporean goods and services rose only modestly, indicating an on-going squeeze on margins. Unless demand increases further, this could have repercussions on investment and hiring plans in the months ahead."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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