Singapore dollar trades at $1.2198

The local currency has been appreciating against the greenback.

IG Markets Singapore said:

The Singapore dollar has broken out of a very tight range against the greenback, dropping below the $1.22 threshold this morning.

Yesterday the Monetary Authority of Singapore conducted its bi-annual macro-economic review and forecast inflation to stay within the 3.5% - 4.5% range next year.

This has implications for the local currency which is used as an inflation-busting tool. The Sing dollar has been appreciating against the USD this year which would help reduce imported inflation as its purchasing power has improved.

But it also makes Singapore exports more costly at a time when factory output and manufacturing are showing signs of weakness. This presents a difficult juggling act for the MAS as it needs to keep one eye on rising consumer prices while supporting the local economy.

The Singapore dollar trades at $1.2198 this morning against the greenback, which has seen reduced action with Wall Street closed for two days due to Hurricane Sandy.

DBS Group Research meanwhile noted:

The US Federal Reserve announced QE3 on September 13. Since then, emerging Asian currencies have rallied against most major currencies as well as other non-Asian BRICS currencies.

The main pressure is coming from the concurrent expansion in the balance sheets of central banks in the world’s major reserve currencies, the four currencies in the IMF’s Special Drawing Right – the US dollar, the Euro, the British pound and the Japanese yen.

As these major balance sheets expand, surpluses in the balance of payments of emerging Asian economies have also increased. In fact, some countries – Philippines, Hong Kong, Korea, Singapore and Malaysia – have started to report record high foreign reserves again. They are likely to be joined by China, Taiwan and possibly Thailand soon.

There are also other signs of Asian central banks starting to worry about capital inflows again.

The People’s Bank of China is now on inflation watch again. Since October 10, China has lowered the USD/CNY parity rate by 0.7% from 6.3449 to 6.3028. Neither did the Monetary Authority of Singapore lower its vigilance against inflation; the exchange rate policy band remains on an accelerated appreciation path at the last policy review on October 12.

The Hong Kong Monetary Authority reportedly intervened many times since October 19 to support USD/HKD at the lower limit of its 7.75-7.85 convertibility band. Another strong indication is the new property measure by the HK government; a new 15% stamp duty was imposed on property purchases by non-local residents.

Bangko Sentral ng Pilipinas admitted on October 25 that it cut interest rates (by 25bps to 3.50%) to manage inflows, but conceded that even this may not be enough to deal with the challenge.

Last but not least, the top beneficiary of QE3 was the Korean won which hit a 14-month high yesterday. Not surprisingly, the Bank of Korea wants to investigate next month if banks operating in the country are speculating in the won’s appreciation.

Against this background, pay some attention to the G20 Summit this weekend. Given the ongoing deleveraging process in America and Eurozone, Asia will once again be urged to contribute more to support world growth. Moving towards domestic demand will require the region to boost its purchasing power via stronger exchange rates.