Singapore: MAS steady but GDP slowdown to undermine SGD - Westpac

Sean Callow, Research Analyst at Westpac, suggests that the combination of the MAS's steady hand on policy and the contraction in Singapore’s Q3 GDP is broadly neutral for SGD initially, but probably slightly bearish multi-week/month.

Key Quotes

“The MAS’s gloomy growth outlook leaves core CPI vulnerable to disappointing. Markets are likely to approach the April 2017 review again braced for a potential dovish re-centering of the SGD band.

Having surprised on the dovish side in April this year, the MAS policy of 0% SGD NEER appreciation raised the bar in terms of further action. The central bank retained its projection that core inflation will “trend slightly below 2% on average” but said the “Singapore economy is projected to grow at a slower pace in 2016 than envisaged in the April policy review” and that growth “is not expected to pick up significantly in 2017.”

While MTI as usual headlined the advance GDP report with the y/y growth rate of 0.6%, the MAS quoted the -4.1% q/q annualized contraction, driven by a slump in manufacturing output. Moreover, the previously resilient services sector contracted for a third straight quarter and is now -0.1% even in y/y terms.

Westpac had been looking for a negative Q3 GDP headline given Minister for Trade and Industry Lim had warned that there will be some quarters of negative growth. But he also said recession is unlikely, which remains a reasonable call. This very early reading on Q3 GDP could well be revised higher, or if not, then Q4 might see at least a statistical rebound from the low base.

Yet MAS is downbeat on 2017, noting that globally there is a “continuing shift in the composition of demand towards less import-intensive consumption spending” which implies sluggish global trade volumes. With underlying growth decelerating and the MAS noting ample global commodity supply and a looser labour market, there remains the risk that inflation does not make much headway back to target. As such, the April review could see a band re-centering if the outlook softens again into early 2017.

USD/SGD absorbed the mixed news with choppy price action: bouncing from 1.3820 to 1.3865 on the GDP data which printed first, then sliding to a 1.3775 low as the MAS’s steady hand was revealed. While consensus was for no change, there had been a decent amount of market talk about a re-centering of the policy band, perhaps of 0.5-1%.

But the SGD rally didn’t last long and going forward, SGD should spend most of its time in the lower half of the policy band. On our estimates, SGD NEER was -0.1% versus the band midpoint at Thursday’s close so there is plenty of room in the +/-2% band. If we see broad-based USD gains into a Dec Fed rate hike, then USD/SGD should grind towards 1.41-1.42.”