The Singapore dollar is at its weakest against the US dollar for a long time. This article looks at the details, why it might be so and what it could mean for FX rates in the near future.
The FX rate of the USD/SGD is trading around the 1.2400 levels, which is its low since May this year. Stronger than expected GDP (gross domestic product), the lack of monetary policy changes from the Monetary Authority of Singapore, and the general improvement in risk sentiment contributed to the Singapore dollar’s gains.
Earlier this week, Singapore printed a 1.0% contraction in GDP for the past quarter, as the downturn in confidence in the emerging markets caused a reduction in foreign investment flows and foreign exchange activity in the country. However, the central bank refrained from adding any stimulus and decided to maintain the current levels of appreciation of the Singapore dollar since the negative growth figure was small compared to the previous 16.9% growth in Q2.
This week also, the U.S. government officially ended its shutdown when lawmakers finally passed a deal to extend the debt ceiling deadline and avoid a default. This contributed to a strong risk rally, particularly among the FX rates of emerging markets and Asian economies, as traders no longer worried about the outlook for the global economy.
Data from China this week also came in mostly stronger than expected, with the GDP printing an improvement from the previous 7.5% growth to 7.8% in Q3 this year. Retail sales were slightly weaker than expected while industrial production was in line with consensus at 10.2% annual growth.
With that, the Singapore dollar was able to extend its FX gains against the U.S. dollar and other Asian currencies. Another factor that contributed to the pair’s slide was speculations that the U.S. Federal Reserve would refrain from tapering this year, as an effect of the government shutdown.
Furthermore, the Fed is not expected to reduce its asset purchases next year as the next Fed head, Janet Yellen, is aggressive about meeting inflation and unemployment targets.
Technical indicators for the USD/SGD FX pair are still bearish, as the pair seems on track to fall to the next support zone around 1.2200. A break of this level could mean a move further south to 1.2000. The pair is currently trading below its exponential moving average (20) on the 1-hour time frame.
It appears that the path of least resistance is to the downside, as the Singaporean economy has more upbeat prospects compared to that of the US. Although the debt ceiling deadline has been extended to February, this simply buys the government more time to come up with a plan for spending cuts and they will eventually have to face the prospect of a default again next year.
As for Singapore, the rebound in confidence in the Asian region sparked by promising data from China could renew foreign investments to the city-state. This in turn would drive business and investment, which would then fuel hiring and overall economic growth.
Earlier in today’s Asian trading session, the Singapore equity benchmark was one of the best performers in the Asia-Pacific region. Singapore FX Exchange Ltd. chalked up a 1.9% increase to 7.43 SGD, which is its highest level in three weeks.