MAS Ups Pace Of Sing $ Appreciation, Citing Price Pressures

Source : The Business Times, October 11, 2007

Currency hits 10-year-high against US$ as news of new stance trickles in











The Monetary Authority of Singapore (MAS) surprised currency markets with a decision to 'increase slightly' the pace of annual appreciation for the trade-weighted Singapore dollar in its semi-annual Monetary Policy Statement yesterday - while keeping unchanged its overall stance of a modest and gradual appreciation.

Explaining the decision, MAS in a statement said: 'Domestic price pressures are expected to persist due to heightened supply constraints, while externally, oil, food and other commodity prices will remain firm into next year.'

A stronger currency would help contain price increases by lowering the cost of imports.

Traders reported that the US dollar slid to a fresh 10-year low of S$1.4620 when the news of MAS' stance hit the market at the start of currency trading yesterday morning, but it was able to make a slight comeback thereafter to end the day at S$1.4645 - possibly aided by some intervention, traders speculated.

That said, the news also prompted currency strategists to lower their end-2007 and 2008 forecasts for the US dollar yesterday.





















In its latest statement yesterday, MAS raised its inflation forecast for 2008 to 2-3 per cent, with the recent Goods and Services Tax (GST) hike expected to raise headline consumer price inflation (CPI) to 3.5 per cent in the first half of 2008. This is up from the 1.5-2 per cent inflation pace that MAS now expects for the local economy in 2007 as a whole - which in turn was raised from the more modest 0.5-1.5 per cent rise in prices predicted in its April 2007 statement.

For overall GDP growth, the republic is also expected to out-do April's 4.5-6.5 per cent forecast, to grow at the upper end of a revised 7-8 per cent pace this year.

In announcing its decision yesterday, MAS revealed that besides upping its appreciation pace slightly, there would be no re-centring of its policy band, or its width - both of which are undisclosed by the local central bank.

Since the early 1980s, the local central bank has fine-tuned the value of the S$NEER as the main tool of its monetary policy, given the very open nature of the local economy.

Private sector models have estimated that since MAS first implemented its current stance for a modest and gradual appreciation of the S$NEER in April 2004, this has translated into an annual appreciation pace of something like 1.5-2.5 per cent per annum, within plus/minus bands of up to 2.5 per cent around its changing central value.

With MAS' decision to 'increase slightly the slope of the S$NEER policy band' announced yesterday, that annual appreciation pace of 1.5-2.5 per cent could now have been raised to something like 2-3 per cent, suggest MAS watchers here.

Jimmy Koh, head of economic and treasury research at UOB, suggests an appreciation pace of 2.5 per cent into 2008, while JPMorgan's head of Asia forex research Claudio Piron estimates the pace has risen now from 2.25 to 2.75 per cent per annum.

And, suggested OCBC currency strategist Emmanuel Ng yesterday: 'Our initial take is that the slope steepening, as opposed to the other alternative of re-centring the band higher at pre-announcement levels, represents a more hawkish policy signal. Over the medium term, this suggests greater latitude for S$NEER appreciation if the need so arises compared to a band re-centring.'

Mr Koh explained his upward-revised 2.5 per cent appreciation pace for the S$NEER based on MAS' higher inflation forecast: 'If inflation is now expected to rise 2-3 per cent in 2008, this would seem to suggest that the S$NEER appreciation path will also increase from the previous estimate of 2 per cent to 2.5 per cent or so.'

He has accordingly revised his year-end targets for the US dollar lower this year and next - to S$1.47 and S$1.44 respectively, compared to S$1.48 and S$1.46 before MAS announcement yesterday.

He explained: 'It appears to us that China may have also upped its appreciation pace for the yuan more recently, to something like 5-7 per cent per annum, and we expect Asian units to become more willing to take over the bigger share of appreciation versus the US dollar in 2008 - taking over from 2007's top gainers like the euro, Australian dollar and Canadian dollar.'

Mr Piron, who estimates a slightly faster pace of 2.75 per cent, now expects the US currency to finish the year at S$1.46, down from S$1.48 before the MAS decision.

But, he cautioned that this may not have any large impact in the short-term: 'Note that an additional half-a-per-cent increase in the slope translates into an additional 0.13 basis points per day on a 360 day count basis.

'Indeed, the MAS is suspected by some participants to have slowed Sing appreciation this morning near the USD/SGD 1.4640-50 level, which according to our MAS S$NEER reading at the time was 130 basis points on the strong side of the policy band and close to (our estimated) 150 basis point upper limit.'