The MAS has kept the slope, band width and the centre of its SGD NEER policy unchanged, but removed the forward guidance, notes Frances Cheung, Research Analyst at Westpac.
“The MAS has maintained the rate of appreciation of its SGD NEER policy band at zero percent, with the width of the policy band and the centre unchanged. The forward guidance “extended period” was dropped. The market had mostly priced in the removal of the forward guidance, and some participants might even have had a slim hope for an outside chance of a more hawkish action. As such, initial reaction was a tad higher in SGD rates while spot USD/SGD was up mildly after some two-way fluctuations in the first few minutes. But overall reaction was muted. On growth and inflation forecasts, the MAS sounds mildly softer on inflation, while the “upgrade” to 2017 GDP forecast is more of a mark-to-market exercise.”
“In the latest MPC statement, the MAS mentioned the October 2016 MPC statement (but not the April 2017 one) regarding the forward guidance, which may be the point of time this prior “extended period” was referenced against. With the MAS having the flexibility to tighten if needed, there will be from time to time market expectation for that, though the inflation outlook remains benign. Against this backdrop, and if SGD liquidity continues to be supportive, the outperformance of short-end SGD rates over USD rates is likely to continue, with forward points potentially suppressed. Spreads between SGD and USD rates are relatively wide for spot rates and short-dated (1Y and 2Y) forward short-end (1Y to 3Y) rates. There is a higher uncertainty as to whether this SGD rates outperformance can be sustained for longer tenors, given diluted impact from forward points and if global rates remain on an uptrend.”
“The SGD NEER has been trading in the upper half of the policy band for most of the time since the April 2017 meeting, fluctuating around a strengthening trend. The SGD NEER is likely to trade mostly at the upper half of the band given the MAS has the option to tighten. That said, premised on our view for the USD to broadly strengthen, it will be tough for the SGD NEER to stay sustainably at more than 1% above the centre.”
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