SGD Outlook (1-3 Months)– Cannot rule out another inter-meeting easing before October

Singapore Dollar was a middle of the road performer in May, but SGD is expected to play catch-up to the downside. CPI inflation and industrial production data for April reinforce, according to RBC Capital Markets. Core inflation fell from 1.0%y/y to 0.4%y/y, the lowest since 2010. And even though the final revision of Q1 GDP came in stronger than expected at 2.6%y/y (cons: 2.2%y/y), it seems that Q2 has started on a weak note, with industrial production growth contracting further, from -5.5% to -8.7%y/y in April, the lowest rate of growth since February 2013. Indeed, the IMF highlights that the risks to Singapore's growth outlook is tilted downward and the uncertain outlook could weigh on private consumption and investment. 

As for external growth momentum, slower growth in Asia, particularly China, represents renewed risks to exports. China is Singapore's largest trading partner, representing 11.6% of total trade. Slower growth in Asia will also restrain activity in a range of services industries through reduced tourism. The Services sector is the biggest sector of Singapore's economy and accounts for ~70% of GDP. MAS's 2015 GDP growth forecast of 2-4% appears a little too optimistic, says RBC Capital Markets. 

Analysts assume MAS' decision to maintain its policy of a modest and gradual appreciation of the S$NEER policy band in April with no change to the slope and width of the policy band, and the level at which it is centred was a policy error and the MAS will be forced to ease monetary policy, potentially before the next scheduled Monetary Policy Statement in October.