FX Daily: SGD to depreciate if EUR and CNY do

No urgency for more SGD appreciation.
Philip Wee26 Jan 2021
    Photo credit: Unsplash Photo

    USDSGD, as per our calculations, could rise to 1.3350 if EURUSD falls to 1.20 and USDCNY rises to 6.50. There is no urgency for more SGD appreciation after its 11% appreciation against the USD between late March and early January. The SGD NEER has, as per our model, been holding close to the mid-point of its zero-appreciation policy band. 

    No change is expected at the next SGD policy review in April. Singapore’s negative core inflation deepened to -0.3% YoY in December after holding between -0.1% and -0.2% in the previous three months. The unemployment rate out tomorrow is expected to stay firm around 3.5% in 4Q20, a reminder that low domestic price pressures will offset the upward pressures from higher energy prices. Consensus expects also today’s industrial production to contract by -1.1% MoM in December after the 7.2% expansion in November. The Ministry of Trade and Industry has outlined a plan to grow Singapore’s manufacturing sector by 50% over the next ten years.  

    EUR faces downside risks ahead of the European Central Bank’s policy review in March. The ECB is steering towards maintaining favourable financing conditions, namely bank credit conditions and bond yields, as the criteria for setting stimulus. ECB Chief Economist Philip Lane yesterday elaborated that the ECB would, if needed to prevent a premature steepening in bond yield curves, increase spending on its remaining EUR1.85tn Pandemic Emergency Purchase Programme or PEPP. Conversely, the US Fed did not appear to mind a steeper US treasury curve to reflect an earlier and stronger US recovery from stimulus and vaccinations. Farther out, the ECB’s plan may face resistance from hawks when inflation returns higher with growth in 2H21.  

    USDCNY has been trapped in a 6.45-6.50 range this month after a brief dip to 6.43 on 5 January. China’s stronger-than-expected 6.5% YoY growth in 4Q20 could not eclipse the spread in the new wave of infections from Hebei to Beijing and Shanghai. Officials have discouraged locals from travelling to visit relatives for the Chinese New Year in a bid to prevent a rise in infection rates. The central government has refrained setting a national growth target despite growth forecasts of more than 6% by some provincial governments. CPI inflation has remained flat despite turning positive again at 0.2% YoY in December from -0.5% a month earlier.

    Philip Wee

    FX Strategist - G3 & Asia
    [email protected]

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