Low rates may weigh on Singdollar after MAS policy hold

[SINGAPORE] The Singdollar could once again be seen as a funding currency in the region after the Monetary Authority of Singapore (MAS) surprised markets by holding monetary policy settings, said an HSBC analyst.

On Wednesday (Oct 14), MAS announced that it would be leaving the slope, width and centre of the Singapore dollar nominal effective exchange rate (S$NEER) policy band unchanged, defying market expectations.

Other analysts were more positive on the Singdollar, with Maybank staying bullish on its prospects and DBS noting that the US dollar-Singdollar pair has remained stable.

The central bank said that the current policy band “will allow the S$NEER to continue to strengthen and lean against the anticipated near-term rise in imported inflation, ensuring the gradual easing of inflationary pressures in 2027”.

It added that it “is well-positioned to respond effectively to any risk to medium-term price stability and will continue to closely monitor economic developments”.

Joey Chew, head of Asia foreign exchange (FX) research at HSBC, noted that the S$NEER fell by nearly 10 basis points in HSBC’s model and was about 1.4 per cent above the midpoint of the band.

The decline was modest, she added, probably because the S$NEER had not risen much going into the policy statement.

“Given that the next MAS meeting is only in late January, we suspect the market will go back to seeing the SGD as a potential funding currency in the region,” Chew said in a research note.

A funding currency is one that investors borrow, because of its low interest rates, to buy higher-yielding assets elsewhere. Chew said the Singdollar has faced downward pressure, likely stemming from its low interest rates, with the S$NEER’s implied yield at about -1.6 per cent.

Growth in FX deposits has risen, while growth in Singdollar deposits has fallen, she pointed out.

Chew still sees MAS wanting the S$NEER to stay firm within the band, appreciating in line with the slope, and pointed to the central bank’s comment that the S$NEER should continue to strengthen.

But she noted that MAS’ FX reserves have fallen quite sharply in recent months, after adjusting for redemptions and maturing long FX forward positions.

Until MAS does more unsterilised intervention and US rates plateau, it may be hard for FX forward points to rise, she said. MAS has been selling US dollars against the Singdollar, but has also been net redeeming MAS bills.

Bank of America (BOA) analysts Ang Kai Wei and Abhay Gupta also saw the surprise as keeping interest alive in shorting the S$NEER.

They explained that the Singdollar’s low volatility and its position near the top of the policy band could keep investors interested in betting against it, even though the trade earns only about 40 basis points a year in interest difference.

Ang and Gupta said that MAS sounds less concerned about domestic price pressures, making it less likely to push up local interest rates soon. They expect the Singapore Overnight Rate Average, a key short-term interest rate benchmark, to stay around 1.2 to 1.4 per cent.

MAS could raise the slope in early 2027 if oil prices stay elevated through the fourth quarter, imported food prices rise because of El Nino, or the artificial intelligence investment boom proves more durable than thought, said Chew.

The BOA analysts also expect a “calibrated tightening” in January 2027.

Singdollar resilience

Others pointed to the Singdollar’s resilience. Maybank’s FX research team, led by Saktiandi Supaat, said: “We remain bullish on the SGD as the credibility of its institutions is an increasingly scarce commodity in an uncertain world and this should continue to build SGD resilience.”

Maybank said that the US dollar-Singdollar pair traded at 1.2796 before the decision and 1.2804 after, edging up to 1.2810 later, when it put the S$NEER at 1.55 per cent above the midpoint.

The analysts forecast the pair at 1.2650 by the fourth quarter of 2026 and 1.2450 by the third quarter of 2027, and prefer to sell the US dollar on rallies.

DBS senior economist Chua Han Teng and senior FX strategist Philip Wee noted that the USD-SGD pair has been remarkably stable within a 1.26 to 1.30 range, despite MAS’ two monetary policy tightenings in April and July and the US Federal Reserve’s September hike.

The stability held even as the US dollar index climbed to an 18-month high, and is a better reflection of the impact of MAS policy, they said.