MAS preview - tightening in view

Friday will find two key updates for the Singapore economy with both the Monetary Authority of Singapore (MAS) policy decision and advanced Q3 GDP release potentially packing surprises for the market.

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Expectations for the twice-a-year MAS monetary policy meeting to yield another tightening in its October iteration had been brought to a boil in the countdown towards their October 12 release. Following the latest April decision to bring the slope of the Singapore dollar nominal effective exchange rate (NEER) policy band back to positive, albeit slightly, the market had been looking for another move going into October. Strong GDP figures in the first half, seen at an average of 4.2% year-on-year (YoY) for the first half of 2018, coupled with improving inflation readings, where core CPI last arrived at a 4-year high of 1.9% YoY, are clear indications of the economic robustness. Meanwhile, the MAS NEER, which reflects the SGD strength against a basket of major trader partners’ currencies, had adopted a steady uptrend since April from the “gentle strengthening” between October and end-March that could provide impetus for the MAS to move once again.

Source: Reuters

Nevertheless, factors that could present a setback for further policy tightening remain pertinent. April’s MAS macroeconomic review saw the “cautious optimism” from the Singapore central bank on the back of rising trade tensions that had thus far yet to take a turn for the better. Fresh tariffs had once again been implemented into late September at $200 billion worth of Chinese goods by the US and $60 billion vice versa. The harsh exchanges between US and Chinese envoy further fuel to the likelihood of escalation towards the remaining $267 billion of Chinese imports previously suggested by President Donald Trump. That said, while a difference in growth momentum have indeed started showing between US and Asian economies, concerns of trade tensions appear to be drawing a greater reaction only within the equity space and have yet to significantly derail growth. The question would be - to what extent the MAS will likely be cautious over optimistic. MAS central bank chief Ravi Menon in an early October interview had certainly struck a positive tone reflecting the lack of need to overreact despite rising global economic risks, tilting the bias towards further tightening. One to watch.

Given the rather split views amongst analysts, the reaction will likely transpire into markets in either directions. A prospective 0.5% rise in the slope from the current consensus 0.5% for the NEER will likely bring about a strengthening of the Singapore dollar come Friday’s announcement. Notably, however, the reaction cascading through to the FX market will likely be a function of both the conclusion from the semi-annual statement and the measure of the advanced Q3 GDP result against expectations. The current market consensus sits at 2.5% year-on-year according to Reuters polls, down from 3.9% in Q2. This is no surprise given the expectation for manufacturing sector moderation and the high base from last Q3, that could render the policy review to be the key driver.

Look for any USD/SGD dips with the decision to tighten monetary policy that could potentially bring the pair back below the 50% Fibonacci retracement level at $1.377, and in turn lock prices back into the consolidation zone.

USD/SGD

Source: IG

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