Rising US bond yields threaten to drive down Singapore dollar

SINGAPORE (BLOOMBERG) – Rising US bond yields leave the Singapore dollar vulnerable to retesting a four-month low against the greenback in the run-up to the city-state’s half-yearly monetary policy review.

Elevated rates on Treasuries helped push the currency pair through its 100-day moving average earlier this month, before momentum stalled at 1.3531, just short of the 200-day moving average.

But it may just be a matter of time before that level is breached. Yields have surged further since the Federal Reserve last week hammered home its intention to let inflation overshoot, and the prospect of a second US stimulus package could propel them even higher. This is increasing the allure of the greenback and points to renewed weakness in the Singapore dollar.

“In the very near term the Singapore dollar is likely to benefit from the dovish Fed tone,” said Mitul Kotecha, chief EM Asia & Europe strategist at TD Securities in Singapore. “However, further out, we think higher US yields will likely result in a firmer dollar and as such the Singapore dollar will be one of the more vulnerable currencies in Asia.”

Singapore inflation data due on Tuesday (March 23) may add to the case for a test of the 200-day moving average, and even a possible run back toward resistance at 1.38. The pair hasn’t touched that level since late July.

Core inflation is forecast to rise just 0.1 per cent in February from a year ago, following negative readings over the previous 12 months. A benign uptick in price pressure would give little cause for the Monetary Authority of Singapore to adjust the exchange-rate band it uses to ensure price stability.

“We expect the central bank to maintain the neutral policy,” said Irene Cheung, a currency strategist at Australia & New Zealand Banking Group in Singapore. “Inflation is emerging from deflation, but will remain modest.”

In its last decision in October, the MAS left policy unchanged, given price changes were gradual and core inflation was expected to remain well below its long-term average. Its next review is due in April.

While the MAS doesn’t disclose the parameters of its exchange-rate settings, Ms Cheung estimates that the Singapore dollar is trading slightly above the midpoint of the band.

This also suggests the currency has scope to weaken, and is consistent with movement in the country’s nominal effective exchange rate versus its major trading partners, which shows the currency in the upper end of its 12-month range.

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