Maybank FX Insight: SGD: USD/SGD To Play Catch-up To 3-Month SIBOR? - 23 Jun 2015

SGD: Playing Catch-Up To 3-Month SIBOR?

      The recent run-up in the 3-month SIBOR amid dollar strength as Fed prepares a lift-off in its fund rate while at the same time the USD/SGD has been quite resilient hovering around the 1.32-1.35 region. This begs the question whether the strength in the SGD has been overdone and a correction due.

      Our analysis shows that UIP long term condition holds in the Singapore context with the difference  domestic interest rates and  US interest rates  largely “explained” by the expected appreciation of the S$ against the US$. At the same time, the residuals from our UIP estimation suggested that the expected change in the exchange rate cannot be explained by just interest rate differentials alone. The UIP residuals suggest that aside from interest rate differentials, risk premia could also play a role in explaining some of the deviations from the UIP conditions.

      The results reinforce our USD/SGD outlook for the rest of the year and allow us to keep our current USD/SGD forecasts into 2016 intact. With respect to the SGD/MYR, the potential for further weakness in the SGD against the dollar ahead, opens up the possibility that the SGD/MYR, which is currently inching to uncharted territories above the 2.80-handle, could see some relief. Should the USD/MYR maintain its current trajectory or remains stable, we could see the SGD/MYR come off from its historic highs back towards more familiar levels around 2.70-2.75.