Rising inflation has a growing currency impact
The Singapore dollar is strengthening against the Malaysian ringgit, for example, as inflation continues its high streak.
Even though the Monetary Authority of Singapore is tightening monetary policy to temper inflation, the Singapore dollar is outperforming its neighbor currencies, which should result in a stronger SGD-MYR at least for the short term.
Here's more from OCBC:
Core inflation is likely to remain in the crosshairs of the authorities in the coming months with underlying pressures expected to remain above trend.
The upward inflation trend in Singapore coupled with the easing inflation trend in Malaysia has led to the MAS tightening its monetary policy while BNM remains neutral (with a slight downside bias if growth were to come in disappointing this year). This widening inflation differential supports the case for stronger SGD-MYR in the nearterm.
From a structural point of view, if we look at how Singapore’s current account balance/GDP has outperformed Malaysia’s over the 2001-2011 period (except for the slump in 2008-2009), it is hardly surprising to see the SGD-MYR trending up in the same time period. Going forward, the relative difference in current account balance/GDP is expected to average by about 10ppts – this is still at multi-year high, and is a strong basis of the SGD outperformance.
If we believe in the improved flows perspective for Singapore (vis-à-vis Malaysia), the outlook for relatively stronger FX accumulation should also bode well for SGD-MYR, although we note that this relationship has not held 100% of the time.