An overvalued exchange rate in SGD and a central bank that is slow and reactive to the downside risks to its forecasts leaves us comfortable with an underweight SGD view.

The combination of low implied volatility and low yield renders SGD as a very attractive funding currency for high yielding Asian FX and we expect SGD underperformance to become more entrenched in the longer term, particularly if Fed delivers minimum 2 hikes in funds rate by end 2017, as we expect.

Spot and forward SGD-USD IRS spreads have been dense across the curve, with SGD rates having decoupled from FX as can be seen from the lowered correlations between SGD rates and the SOR - which is an FX swap implied money market benchmark.

It has been our medium term view that FX should exert relatively less impact on mid-tenor SGD rates than on front-end SGD rates.

But the risk is for a re-coupling at least for front-end SGD rates should EM FX sentiment worsen.

We remain mildly bearish EM FX as the uncertainty around China, commodities and Fed has not disappeared.

Meanwhile, there has not been a fundamental improvement in the Singaporean economy, rendering short-end SGD rates vulnerable to an adverse change in FX sentiment.

We recommend paying 1Y SGD IRS versus receiving 1Y USD IRS, at a spread of 60bp with a target of 90bp and stop at 45bp.

The carry is -2bp per month. The trade horizon is 1-2 months.

Front-end SGD-USD IRS spreads have been compressed relatively more compared with other tenors, with the 1Y spread one standard deviation narrower than its one-year average.

Front-end SGD rates should also be impacted by FX sentiment more.