Asia FX fight back: will more countries follow Singapore?

The Monetary Authority of Singapore (MAS) bit the bullet and joined a wave of other major global central banks by loosening monetary policy today. The MAS, who use the Singapore dollar as its main currency tool, has reduced the pace of appreciation for the SGD for the rest of this year. Today’s move suggests that the MAS may allow the SGD to appreciate by 1%, against the former rate of 2%.

Although the timing of this announcement was a shock, the actual loosening in policy was not a big surprise after a spate of weaker data from Singapore in recent weeks. Q4 GDP was nearly half the forecasted rate at 1.6%, retail sales fell in November, while non-oil exports have managed to hold up so far, the decline in prices for December seemed to have been the deciding factor for the MAS. Headline inflation fell at an annual 0.2% rate last month, while core prices, which exclude food and energy costs, fell to their lowest rate since 2013.

The MAS cut its growth and inflation forecasts today, it now expects CPI at 0.5-1.5%, its prior forecast was for CPI in 2015 was between 2-3%. Thus deflationary fears and concerns about growth seem to justify its recent move.

Wave of central bank easing

The timing of the move may be less due to domestic factors and more down to external factors. There have been 9 major central banks that have cut rates in recent weeks. The ECB embarked on large-scale QE last week, while Denmark, Canada and India have all announced unscheduled rate cuts in recent days. This comes on the back of a wave of global deflationary pressure, causing sharp movements in some FX pairs.

At this stage it looks like the FOMC, who we will hear from later today, along with the Swiss National Bank, are the only major central banks that are willing to tolerate a stronger currency. After today’s announcement we may find out how comfortable, or not, the FOMC is with an appreciating USD, especially after some multinational US companies reported a negative currency effect on their earnings for last year.

So who could be next?

We doubt that the MAS will be the last central bank to take action and believe that there could be other central banks that may begin an easing programme or add to an existing one, including:

1, Japan:

There is growing speculation that Japan could introduce negative deposit rates a la ECB and SNB. The BOJ is targeting a 2% inflation target. When the sales tax increase falls out of the CPI index later this year the BOJ could find that the target is getting harder to achieve as a weak oil price threatens deflation around the globe. A cut to rates could trigger a sharp decline in the JPY.

2, South Korea:

The Koran won is eking out a small gain vs. the USD since the start of this year, which could hurt its exporters. Already estimates suggest that exports are down nearly 10% so far in Jan compared with this time a year ago. The manufacturing PMI is in contractionary territory and producer prices are falling at a 2% annual rate. The Bank of Korea’s CPI forecast looks optimistic at 3.4% and 1.9%, any downgrade to these forecasts could justify BOK action on rates, which currently stand at 2%, and weaken the won.

3, Thailand

The Bank of Thailand (BOT) may have held rates steady earlier today, but with the Thai baht the fourth top performer in the Asian EM FX space, having appreciated more than 1% vs. the USD since the start of this year, a stronger currency could justify action down the line. Although the BOT said that policy was still accommodative, it is the 7th straight meeting without a change in policy which suggests that there is scope to make a change if the inflation or growth outlook deteriorates. Already 2 out of 7 BOT members disagree with this monetary stance, suggesting that a change may not be too far away. The BOT is hoping that government spending can boost the economy later this year, if this fails to work then we could see the BOT take action.

Takeaway:

• Singapore became the latest central bank to loosen monetary policy today.

• The MAS will slow-down the pace of SGD appreciation.

• This comes on the back of a wave of global central bank easing, as deflation pressures build.

• At the stage the FOMC and SNB seem the only major central banks willing to tolerate a stronger currency.

• Other central banks in Asia who could choose to ease soon: BOJ, BOK and BOT.

• China could be on the cards if we see a further slowdown in growth/ renminbi appreciation later this year.

• Overall, this wave of CB easing could reach Asia in the coming weeks and months and may trigger FX volatility.