What does this year hold for Singapore dollar?

BMI Research believes it is likely to remain on the appreciatory trend.

The Singapore dollar has sold off by approximately 5.4% since its mid-2016 peak and is starting to show signs recovery, according to BMI Research.

"The Singapore dollar is looking technically positive and is likely to remain on a slight appreciatory trend amid ongoing EM FX stability. We expect the currency to appreciate gradually over the longer term as a strong external position, a relatively sound fiscal outlook, and an undervalued exchange rate lend support to the currency," BMI noted.

The firm said the city-state's interest rates are linked to that of the US and will rise with the Fed's rate hiking cycle. However, BMI expect inflation in Singapore to be considerably lower than that of the US, suggesting that the real interest rate differential between Singapore and the US will remain in favour of the SGD over the coming quarters, supporting the SGD.

With regards to the Monetary Authority of Singapore (MAS), BMI pointed out that Singapore's central bank will likely keep its Singapore dollar policy on hold at its bi-annual meeting in April 2017 as growth and inflation remain within the monetary authority's forecasts.

"The SGD's nominal effective exchange rate and real effective exchange rate have both been weakening, and we estimate that the SGD is currently trading near the lower end of the central bank's policy band. This suggests that excessive weakness is unlikely as the MAS will seek to prevent the currency from trading below the band. However, we believe that the MAS is unlikely to seek to guide the SGD stronger amid continued economic headwinds," BMI said.

It furthered, "We maintain our average 2017 and 2018 forecast at SGD1.4100/USD and SGD1.3700/USD. We expect a strong external position, an undervalued real effective exchange rate, and a relatively strong fiscal position relative to the US to provide support. However, significant strength will be capped due to a weaker CNY."

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