Weakness in NEER likely to weigh on SGD’s performance through 2017

Weakness in the Nominal Effective Exchange Rate (NEER) of Singapore is expected to weigh on the performance of SGD through 2017. Despite a no-change decision, the MAS has signaled flexibility in allowing the SGDNEER to trade on the weaker side of the policy band to accommodate near term weakness in growth and inflation.

SGDNEER has weakened 0.5 percent since the policy review of the Monetary Authority of Singapore (MAS). Since the October 14 meeting, the SGD has been one of the worst performers in Asia, losing ground in most of the SGD crosses that we track.

"We see further SGDNEER depreciation of 0.5-1.0 percent into early 2017; stay long USD/SGD into early November, and look to buy dips in AUD/SGD and NZD/SGD. The main exceptions are EUR/SGD and GBP/SGD, which we like to sell rallies," ANZ commented in its research report.

Looking ahead, the Singaporean economy is expected to remain sluggish, with core inflation likely to trend up by less than what is predicted by the central bank, even though headline inflation is expected to turn positive towards the end of 2016. Moreover, a surprise Trump victory will, however, likely see USD/SGD spike higher on the back of increased financial market volatility.

Apart from the US, expect policy divergence (and yield differentials) is also among between the RBA, RBNZ, and MAS underpinning the AUD/SGD and NZD/SGD currency pairs, the report added.

"We see further downside risk of 0.5-1.0 percent in the SGDNEER into early 2017, with the next move by MAS biased toward an easing," ANZ added.