Tags: Singapore | Dollar | Higher

Singapore's Dollar Gets a 'Green Light' to Head Higher

By    |   Wednesday, 16 Apr 2008 02:28 PM

Singapore's economy got a surprisingly unexpected rebound in the first quarter. Gross domestic product grew at an annualized pace of 16.9 percent.

Economists were expecting a gain of 10.2 percent. Wow! What a difference. That was nearly 65 percent more than economists expected.

Consumer prices (CPI) also rose 6.5 percent in February, which is "well above" the upper end of the range of where Singapore's monetary authority would like it to be. In fact, the central bank wants it to hover around 4.5 percent to 5.5 percent right now. So that's way above their comfort level, too.

So with GDP and CPI prices being so strong, the central bank said that "it would allow its currency to appreciate further."

Since the central bank reviews monetary policy twice a year, this approach should stick around for quite some time and should put some wind at the back of the Singapore dollar (SGD).

Instead of raising or cutting interest rates in Singapore, the bank chooses to control inflation by influencing the level of the currency. So if inflation is high, it allows the currency to appreciate.

If inflation is tame or growth slows too much, then they influence the currency lower in order to give the economy a shot in the arm.

The news from the central bank is just crushing the USD/SGD pair as the Singapore dollar eats the U.S. dollar's lunch.

Since consumer prices are now climbing at the quickest pace in 26 years, you can bet they'd rather strengthen the currency quite a bit and somewhat quickly — such is the pressure of the enormous inflation staring them in the face.

Electronics exports are currently waning due to the global slowdown. But the gap is being made up by drug makers like Merck, which are producing more pharmaceuticals.

In addition, the manufacturing sector grew at 13.2 percent in the first quarter from a year earlier.

Look for the USD/SGD to have a long term downtrend as the Singapore dollar continues to strengthen against the U.S. dollar with the blessing of its own central bank.

This means that a U.S. rate cut at the end of the month won't help either. In fact, it will crush the USD/SGD pair even more. So, get short on the USD/SGD pair and enjoy the ride.

This should be a long-lasting trend that takes place over months to a year or two, possibly. However, being that the bank doesn't look at monetary policy but twice a year, you should have quite some time before it even considers a change of mind.

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SeanHyman
Singapore's economy got a surprisingly unexpected rebound in the first quarter. Gross domestic product grew at an annualized pace of 16.9 percent. Economists were expecting a gain of 10.2 percent. Wow! What a difference. That was nearly 65 percent more than economists...
Singapore,Dollar,Higher
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2008-28-16
Wednesday, 16 Apr 2008 02:28 PM
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