MAS to keep the slope, band width and centre of the SGD NEER unchanged - Westpac

Frances Cheung, Head of Macro Strategy at Westpac, expects the MAS to keep the slope, band width and centre of the SGD NEER unchanged at its October MPC meeting and suggests that there is a possiblity that the MAS removes its forward guidance.

Key Quotes

“We expect the MAS to keep the slope, band width and centre of the SGD NEER unchanged at its October MPC meeting, as moderate inflation suggests no urgency to act. The MAS has cited external inflationary pressure but relatively muted domestic sources of inflation in their inflation outlook. The labour market shows a mixed picture, with uneven employment across sectors – overall net employment dropped in both Q1 and Q2. This backdrop may delay the pass-through of wage increases onto the broader consumer prices.”

“That said, the MAS expects inflation to pick up modestly, and sounds positive on Singapore’s growth outlook as well. The central bank expects the trade-related sector to remain a key source of support, financial services activity to further pick up, and the consumer-facing industries to be supported. In this regard, there is a possibility that the MAS changes its forward guidance (i.e. remove “extended period”) in the upcoming MPC statement. A change in the forward guidance will point to the option of tightening at the April 2018 meeting, provided that economic activity and inflation evolve as the MAS expects.”

“Our SGD NEER model shows that the SGD NEER is at 0.75% above centre. SGD SOR has been well-anchored, outperforming USD LIBOR year-to-date, on the back of the broad downtrend in forward points, which has been in turn due partly to the policy expectation. The market is gearing up its expectation for at least some hawkish remarks from the MAS, and forward rates reflect expectation for some forms of tigthening at the April 2018 meeting. If the MAS acts by removing the forward guidance and not more than that, the risk is for investors to take profit as an initial reaction.”

“Looking further ahead, we expect SGD SOR to rise mainly on our expectation for higher USD rates. However, forward points remain the key swing factor. Expectation for the MAS to tighten may from time to time put downward pressure on forward points and hence lessen the upward pressure on SGD SOR and front-end SGD IRS. It is more uncertain as to whether this SGD rates outperformance can sustain for longer tenors, if global rates are on an extended upward trend.”