Singapore dollar to become the most stable currency in Asia

This year, the Singapore dollar has emerged as the most stable currency in Asia against the US dollar. Some strategists are betting that it can strengthen if the central bank turns to tighter monetary policy actions again next month amid price pressures. 

Goldman Sachs Group Inc., Citigroup Inc. and MUFG Bank Ltd. are among those banking institutions that favor the Singapore dollar and are optimistic about it. It is influenced by the fact that the Monetary Authority of Singapore (MAS) may decide to tighten monetary policy further at its October meeting to curb core inflation. According to the data released in July, the rate of core inflation in Singapore hit a 14-year high.

Forecast on the currency markets is updated when almost all major currencies show hints of  decline against the dollar and the Fed pursues an aggressive rate rises policy. Despite the fact that Singapore's official national currency is beating other Asian peers due to the MAS tightening policy, it has fallen more than 4 percent against the U.S. dollar this year. 

MUFG Bank economists assume that there is a 50% chance that MAS will tighten its policy next month. It can cause the national currency to gain more than 1 percent against the U.S. dollar in the coming months. According to them, the assumptions of a Singapore dollar rebound are based on the fact that most of the eventual Fed rate hikes are already being priced into markets now. 

MUFG expects the Asian currency to move up to 1.38 against the dollar by the end of 2022. Last week, the trading session ended in the USD/SGD pair being at 1.4070. 

Nevertheless, if MAS turns to policy tightening for the fourth time this year, there’s no guarantee that the national currency will rise against the U.S. dollar. Earlier this month, the Singapore dollar fell to its over-two-year low. 

According to Divya Devesh, head of Asean and South-Asia FX research at Standard Chartered Bank SG Ltd. in Singapore, despite the measures taken by MAS, the USD/SGD continues to go up amid a broad dollar rally supported by hawkish Fed policy, geopolitical tensions, and a sluggish Chinese economy. 

Risks for the bulls on the Singapore dollar lie in the fact that MAS may continue its policy in the next month. The reason for that is that the central bank has remained its inflation forecast for 2022 unchanged. It may signal MAS that the existing policy is suitable for controlling  inflation. 

The next test is scheduled for Friday, when the core Consumer Price Index figures for August will be released. It is expected to show an increase of 5% from a year ago. The Singapore dollar may come under pressure if the data released fails to meet expectations and the outlook for further MAS tightening worsens. According to Devesh forecast, the national currency will fall to 1.42 per U.S. dollar if MAS does tighten the policy.