FX Daily: MAS surprises with unscheduled tightening

Barring a USD slide, USD/SGD has discounted surprise tightening
Group Research25 Jan 2022
    Photo credit: Unsplash Photo

    Singapore steepened the SGD NEER policy band again at an unscheduled meeting this morning. CPI All-item inflation increased to an eight-year high of 4.0% YoY while core inflation pushed above 2% for the first time since 2014. The 2022 official forecast was lifted to 2.5-3.5% from 1.5-2.5% for CPI, and to 2-3% from 1-2% for core inflation. According to our model, the SGD NEER has been above the policy band since Friday, suggesting the slope before the announcement is likely to have been underestimated like inflation. Barring an abrupt USD depreciation, USD/SGD is likely to have discounted today’s surprise policy move. Nonetheless, a steeper slope will provide the SGD more resilience against a rising USD when the Fed starts its hike cycle. 

    Oversold US stock indices recovered on Monday. Dow and S&P 500 rose by 0.3% each while the Nasdaq Composite jumped 0.6%. US Treasury 10Y yield initially fell to 1.71% but ended the session where it started at 1.77%. Investors are still nervous ahead of the FOMC meeting tomorrow. Despite triple tightening fears, they want to hear how Fed Chair Jerome Powell can prevent elevated inflation from becoming entrenched without derailing the US recovery or disrupting financial markets. Indeed, preliminary January US PMIs for manufacturing and services fell to 55.0 and 50.9 respectively, their weakest levels since October 2020 and July 2020. Today, the Conference Board’s consumer confidence index might also start the year weaker; consensus expects a fall to 111.1 in January from 115.8 in December. As the market reassesses its aggressively hawkish Fed expectations, the UST 2Y yield eased to 0.97%, below 1% for the first time in a week. Meanwhile, investors are no longer brushing aside geopolitical tensions, especially a possible Russian invasion of Ukraine. 

    On the technical front, bearish NZD might find support in the near-term.
     Over the past seven sessions, NZD has depreciated from the top to the floor of its two-month range between 0.67 and 0.69 range. Monday’s intra-day low of 0.6660 was the lowest since November 2020.  NZD tried and failed to push below 0.6680, a support level that is 2 standard deviations from its mean trend value in our model. On Thursday, an increase in CPI inflation to 5.8% YoY in 4Q21 from 4.9% in 3Q21 might return focus towards a possible third rate hike at the Reserve Bank of New Zealand meeting on 23 February. 

    Quote of the day
    “It’s better to look ahead and prepare, than to look back and regret.”
       Jackie Joyner-Kersee

    25 January in history
    The city of Sao Paulo in Brazil was founded in 1554.  

    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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