AUD/SGD Similarities

Singapore’s oil port is considered the busiest on the planet, capable of handling about 1000 tankers at a time; it’s ‘the world’s largest market for shipping fuel’. Even so, the oversupply of crude oil as well as distilled petroleum products have been causing delays at the facility. Singapore’s fuel oil stock had exceeded and since remained near record highs. Singapore had already had plans to expand its storage facilities at Keppel Harbor as well as in Malaysia and Indonesia since early in 2014, well before the oversupply of oil began to build. However, as it stands now, the unloading backlog in the harbor is creating delays, driving prices for empty tanker storage.

The Monetary Authority of Singapore has a monetary policy designed for an export dependent economy, particularly for the volatile global petroleum market. The policy structure focuses on a trade weighted Sing Dollar exchange rate against a basket of currencies of the major trading partners. The MAS keeps the Sing Dollar in a band either side of a central rate. It should be noted that both the band and central rate may be considered policy tools, and are ‘periodically reviewed’; changes are noted in the semiannual policy statements.

It isn’t that the MAS does not engage in short term deposit or lending facilities. The MAS does have an overnight facility, currently at 0.00% as well as a facility borrowing rate at 0.93%. The MAS also provides an ‘Intraday Liquidity Facility’ “... to cater to situations where there are unusually large payments or large receipts within the same day. It facilitates the settlement of payments and helps to prevent system gridlocks owing to timing mismatch...” The point of the matter is that overnight rates are certainly not driving capital inflows.

It’s also important to note that Singapore’s trade economy relies on a type of trade which has evolved from the sailing ship era called entrepôt trade. Today, it may be compared to an asset market’s ‘clearing house’ function. In a nutshell, and pertaining to petroleum products in particular, cargoes are imported, stored, and then re-exported requiring Sing Dollar exchange at each step. [N.B.: the movement of cargo is sometimes virtual; never actually being unloaded]. The most recent data shows that Singapore’s leading import is refined petroleum, at 24% of total and it’s leading exports are both refined and crude petroleum; about 30% of total. 

Hence, it would be a reasonable conclusion that it’s a combination of factors driving the Sing Dollar against its major trade partners. First, demand for petroleum tanker port facilities as well as petroleum storage facilities; second, that Singapore has the perhaps the world’s leading largest combined facilities; third the over-production and supply is driving demand for these facilities. Lastly, Singapore’s system of entrepôt trade is strengthening the Sing Dollar vs its trading partners.  



Nearly 42% of all Aussie exports to Singapore are crude oil, 17% is refined petroleum. On the other side of the coin, more than half of Australia’s imports from Singapore is refined petroleum. Hence, a strong bilateral trade exists between the two, with a significant common thread: petroleum.

It’s clear to see how the economic readjustment in the Asia-Pacific has weighed on the policy decisions of the Reserve Bank of Australia from the statements released after each decision. From the 5 May meeting, at which it was decided to reduce the OCR by 25 basis points, the statement notes “... commodity prices have declined over the past year, in some cases sharply. These trends appear largely to reflect increased supply, including from Australia...” The RBA stood its ground after the May reduction; the same notation on commodities is reiterated in the statements of the next six meetings. 
 
In spite of the fact that the RBA has only reduced its OCR twice totaling 50 basis points year to date, the Sing Dollar has steadily strengthened vs the Aussie, from SGD $1.09457 mid-January to SGD $0.98778 early September; nearly a 10% gain on the Aussie. It’s worth noting that the RBA overnight cash rate is at 2.00%, one of the highest in the region. Hence, it doesn’t seem to be as much an Aussie weakening as much as it is a Sing Dollar strengthening. 

A key point needs to be made referring back to the MAS model of currency intervention utilizing a basket of major trade partner currencies. Sing overall economic forecasts have been reducedi. After petroleum Singapore’s second major export are Integrated Circuits. The Grid below compares four crosses. Observe that the Sing Dollar is strengthening vs the Aussie and Kiwi, where the leading bilateral trade involves petroleum, whereas the Sing Dollar weakens where the leading trade involves electronics (Hong Kong); pharmaceuticals and electronics (Japan).



The point of the matter being that the Sing Dollar is strengthening vs currencies for which amply supply of an export exists, and weakening vs currencies for which the leading exports are not only non-petroleum, but other top manufactured exports. The MAS model of currency intervention is proprietary and anonymous, but most likely, the MAS does not have the leverage to ‘bend’ market demand their way. However, because of the oversupply of commodities, and the high demand for port and storage facilities, there’s no good reason to intervene in that sector. However, there’s every good reason to intervene wherever it can to stimulate its manufacturing economy outside of oil, for example, electronics and pharmaceuticals for export.

Hence, it’s reasonable to conclude that as long as there is high demand for petroleum port and storage facilities, plus the potential for continued OCR reductions, the Sing dollar will continue to trade in its current range vs the Aussie Dollar, and naturally stronger should the RBA cut further.