USD SGD Outlook-2016

Abstract

Interest rate:1. Historically, Singapore has had a lower interest rate compared to US, indicating potential appreciation in SGD against USD. But that leading edge over USD is gone now for SGD since last 3-4 years.GDP:1. Singapore economy is bracing itself for sub-3% annual growth rate in coming years. It would be first time in last 6 years that economy will post 2% growth rate in 2015 (it has slashed its previous forecast of 2 to 4% annual growth) .2. Economy is slowing due to various external reasons such as China’s deceleration, weaker trade and poor growth in ASEAN region, ongoing and impending US rate hikes, Oil price slump, etc.3. We need to be reminded of the fact that when China's growth plunged from 9.5% in 2011 to 7.7% in 2012, the rate of growth here also dropped by 50% over the same period, from 6.2% to 3.4%. Though, such a decline is not expected in future but the country is vulnerable to China’s economic slowdown.Inflation:1. MAS now expects inflation at 0.5% this year (2015) compared to its previous forecast of 0.5-1.5%.2. MAS has admitted that wage inflation is still high.3. In November 2015, Country has witnessed 13th straight months of negative inflation rate (the longest streak since 1987 crisis). It is giving an indication that monetary easing in the offing in Q1 2016.Singapore dollar nominal effective exchange rate (NEER):1. Citing continued SGD depreciation since last 3 years and potential depreciation in the future and growth slowdown, there is likelihood that the MAS will review its current view towards NEER and ease the policy by changing the currency’s appreciatory slope to neutral, from its current slightly appreciatory bias. Though, any aggressive monetary policy loosening is not expected citing the impending US Federal Reserve Rate hikes in 2016.2. SGD exchange rate has moved towards the bottom of MAS policy band, suggesting even more loosening of monetary policy for the economy is on the cards.