Singapore retains existing FX policy, traders focus on ECB meeting

Forex News and Events

In an unexpected move, the Monetary Authority of Singapore (MAS) maintained its existing policy of measured NEER band appreciation. The policy statement directed "no change to the slope and width of the policy band, and the level at which it is centered." There had been speculation over Singapore’s FX framework as being breakable as the SGD NEER was been pushed to the bottom band. This pressure sparked chatter on foreign reserves levels and comparison to the SNBs failed CHF policy. However, sweeping away the hype the economic data did not demand easing today. While the economic outlook for Singapore has deteriorated in recent months, the data has not be so bad as to warrant additional modification (band widening). The tone of the semiannual Monetary Policy Statement was slightly more optimistic. Inflation data has slow but steady at 1.0% and Q1 growth at 2.1%, was higher than consensus. The market’s reaction to sell USDSGD was predictable considering the overdone expectations. With USDSGD at 1.3600 plenty of speculative longs have been cleared out providing an good entry point to reload USDSGD longs. In addition, with the MAS stating that reports of heavy FX intervention are incorrect, liberates the upside. USD bearish reversal is slowing. While structural issues and further policy easing will disturb SGD, we see further upside in USDSGD.

EURUSD is consolidating yesterday’s losses around the 1.0550 handle. However, demand is thin and sentiment significantly negative. Not helping the EUR bulls was a story in the FT indicating that Greece is organizing a strategy to declare a debt default, unless it can reach a deal with creditors by the end of April. The report indicated that the Greece government will withhold €2.5bn total repayment to the IMF by June unless an agreement with international creditors can be reached. The most recent leak seems to be a response to a weekend report that Eurozone officials were “shocked” at Greece’s failure to outline structural reform. We suspect Greece’s debt strategy is not a low probably event. The nations is currently hemorrhaging capital and will not have the public funds to pay public sectors salaries and statement pension by months end. The lack of confidence is also manifesting itself in Greeks not paying their taxes, which is only escalating the crisis. We remain considerably negative on the EURUSD and look for rallies to reload shorts. The adjustment higher in the short end yields of the US curve is providing support for the USD. EURUSD finally broke the 1.0570 support and is heading to the next support of 1.0458 (low from March 15). Fresh boost will be needed to break this key support as it also corresponds to a low from March 2003 (1.0504).

With a light calendar in the US session, traders will be looking forward to ECB meeting on Wednesday. It’s unlikely that the central bank will propose any new policy initiatives, so the focus will be on discussions at the press conference. Investors should be concentrating on the ECBs medium term policy outlook, update on QE program and discussions on Greece. What’s is also likely to grab the spotlight is early ending of QE. We suspect that real debate over the exit of the ECB QE program are premature (before September 2015). In an interview conducted Monday, ECB executive board member Yves Mersch was questioned about exit strategy. A known hawk he mentioned that if inflation moved above target “it would of course be appropriate to consider whether we need to adjust our plan.” However, he stressed that “we have not yet arrived at a point where we need to conduct a public discussion on the exit." Clearly QE has made a noticeable impact on the European economy, yet spillover into the mid-term inflation outlook (in headline and core) is too early to measure. Barring a significant deviation from this view reaffirmation of the ECB commitment to QE will keep EUR weak verse EM and USD while holding up well against European peers.