Maybank FX In-Sights: MAS Policy Preview - No Change in Sight on Inflation Fears

MAS Policy Preview – No Change in Sight on Inflation Fears

SGD Policy Deliberations:

·           The SGD NEER currently trades around 0.2% above the mid-point of 1.2670 with the top end at 1.2420 and floor of 1.2925. The SGD has remained quite stable relative to its trading partners, with the SGD NEER close to the mid-point for the past month or so, despite temporarily falling slightly below mid-point in March amid some weakness, in part, against the AUD, EUR, JPY, USD and PHP.

·           Growth in 2014 is likely to be healthy as reflected in the results of the MAS latest survey of private sector economists and analysts that is expecting growth of 3.8%. Recent prints of industrial production and non-oil domestic export data are showing hints the pick-up in the US is beginning to have a favorable impact. Our economics team is now expecting inflation to come in at 2.3% in 2014 due to the expected deceleration in inflation in the early part of the year. This downgrade, however, does not preclude inflation from still picking up going forward as a result of the tight labor market stemming from the ongoing restructuring of the economy as well as imported inflation which could once again raise its ugly head. We expect core inflation to remain elevated in 2H 2014 and 1H 2015 due to some pass-through from unprocessed food prices on top of the ongoing restructuring efforts. Not surprisingly, MAS expects core inflation to come between 2-3% in 2014, higher than last year’s 1.7% and possibly even higher than the 10-year average of 2.0%.

·           MAS’ likely to meet sometime in the second week of April with the announcement either around 11 or 14 April.  Given the still sanguine outlook for growth and despite rising risk of inflation, we still do not expect the MAS to change its current policy stance of a modest and gradual appreciation of the SGD NEER. This mildly- strong SGD trajectory should help to temper the upside risks to inflation expected over the next six months. Though global growth remains uneven and choppy at the moment, the outlook for global growth in 2014 is still generally healthy. Short of a global tail risk leading to a decline in domestic output, we expect policy to remain on hold in April with no change in the slope and width of the policy band, as well as the level which it was centered at its Apr meeting.

·           Based on pure fundamentals or Bayesian adjusted currency move (seen via our model estimates), the USD/SGD pair looks likely to remain on a downwards trajectory (inherent fundamental support for an S$NEER upside move above mid-point). However, a strong dollar strength trajectory in 2Q 2014 or if MAS surprises either with a policy hawkish bias signaling or a tightening move could lead to some volatility in the pair post announcement. At the moment given the near term alignment in our fundamentals and technical analysis above, we would suggest entering USD/SGD short position at 1.2680 to target 1.2458 (76.4% Fibonacci Retacement of the Oct-Jan rally) with a stoploss at 1.2720 with a short one month view. The risk scenarios that may unravel this view would be global event risk scenarios or a significantly strong string of US data releases over the next few months that could lead to sustained dollar strength.

Rgds,

FX Research

Global Markets

Global Wholesale Banking

Maybank