Singapore may not be the largest ASEAN economy, by far, but it is arguably the most strategic in a variety of ways. It’s clearly the most strategically located port city as well as the petroleum hub of the entire Asia-Pacific. Singapore is also one of the best, if not the best place on the planet to establish business, manufacturing operations, or relocate headquarters. As such it’s a critical, integral node of the Asia-Pacific financial network as well as the global financial network.

Over the past several decades, Singapore’s inviting domestic economic structure encouraged the economy to increasingly orient itself with the regional growth leader, China. In particular, Singapore’s services, financial and tourist industries are now more strongly connected to China’s economy. The PBOC and MAS have established a sizable currency swap facility precisely to expedite commerce with the City-State. This created a decade of prosperity for Singapore, until the growth cycle began to end. HSBC estimates that the Sing economy will likely decline 50 basis points for every 100 basis point decline in China’s economy; ANZ and DBS have estimated a 140 basis point decline for every 100 basis point decline. 
 
To put the contagion effect into perspective Singapore’s three month interbank offered rate increased over 10% since the end of 2015: from 1.13535% to 1.25200% as of 13-1-2015. The commercial benchmark swap offer rate has increased 1.448%, year to date. The jump in rates likely indicates a weakening in demand for Sing assets and capital outflow. Complicating that situation have been comments by US Fed officials stating their support for continued Fed Fundsiii increases; i.e., a stronger US Dollar. 
 
Almost exactly one year ago, the RMB took 5th position among all advanced economy payment currencies; surpassing both the Canadian and Australian Dollarsiv. ‘Lest auld acquaintance be forgot’, by the end of 2014 the PBOC had set up bilateral clearing operations and currency swap arrangements with at least 28 central banks, including the UK, Switzerland and Australia. Singapore’s special Yuan swap arrangementv was doubled to $48.3 billion USD (£33.08 billion).

The MASvi is known for its unique currency management monetary policy whose primary objective “...is price stability for sustainable economic growth... ...It manages the Singapore dollar against a trade-weighted basket of currencies of Singapore’s major trading partners and competitors... ...When necessary, MAS intervenes in the foreign exchange market...” 

The Bank of Japan policy has the same objective, but employees the more traditional base rate target and “...decides and implements monetary policy with the aim of maintaining price stability... ...In implementing monetary policy, the Bank influences the formation of interest rates for the purpose of currency and monetary control...” 

Hence the objectives are the same, the methods are different, with this one caveat: the BOJ has, on occasion, revised policy outside of the regularly scheduled calendar decision dates.
Hence both the Japanese and Sing economy are sensitive to both the Yuan and US Dollar exchange and both employee policies designed to optimize the respective exchange rates relative to their respective export economies. 

SGDJPY price chart

A six month chart of the SGD/JPY exchange demonstrates a recent sharp strengthening of the Yen, from ¥90.9775, 13 July to ¥81.66187, 11 January just over -10.239%. It’s important to note that this Yen strengthening is not unique to the Sing Dollar by far. The Yen has been strengthening against the US Dollar as well. 

China and Japan have recently renegotiated the 2002 Chiang Mai Initiativei which establishes an emergency swap network in the event of a global economic crises. The reestablishment of the network may be partly in response to the strengthening US Dollarii. However, this reestablished swap line might also be related to the Yuan’s recent inclusion in the IMF’s Special Drawing Rights basket, effective 1-10-2016. The RMB will have an allocation between that of the Euro and that of the Yen. It’s possible then, that China and Japan are reallocating their respective currency reserves to reflect the new inclusion and it might be, to some extent, contributing to recent Yen strength.

The chart demonstrates the sharp strengthening Japanese Yen vs the Sing since early December. As mentioned the Yen has also strengthened considerably against the US Dollar in recent days. Hence, Yen strength is far more likely due to a flight to quality trade, carry unwinds or combination of both, perhaps a CNY/JPY reallocation by the PBOC or a combination of all three. (N.B.: the Yen has gained over 7.5% over Yuan in the past five weeks).

Although the MAS could intervene, and has the authority to do so at any time, it might prefer to allow the Sing Dollar weaken vs the Yen as the regional economy readjusts. It saves the MAS the trouble trying to outguess turbulent markets. On the other hand, Yen strength may be a source of frustration for the BOJ. Governor Kuroda had in the past expressed his satisfaction with ¥125 to the US Dollar. It’s highly unlikely that the BOJ will continue to exhibit patience with a strengthening Yen. The current trend may not last too much longer as the Yen heading for a one year high vs the US Dollar in January, 2015; almost exactly a year ago! 

Hence, it’s reasonable to conclude that the MAS will tolerate a weaker Sing far longer than the BOJ will tolerate a stronger Yen. Not that the BOJ is targeting the Sing, but rather because of the general strength of the Yen after a year of trying to weaken it. The question becomes whether the BOJ will wait for the 28-29 January scheduled meeting or will at act before then.

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