The Singapore dollar is currently under pressure from rising U.S. trade tensions and expectations that the Monetary Authority of Singapore (MAS) may adjust its exchange-rate policy. The potential for new U.S. tariffs on important exports like pharmaceuticals and semiconductors could weaken the SGD further, especially as it declines against a strengthening U.S. dollar. Analysts, including those from Barclays, predict that the MAS might opt for a more relaxed policy in their next meeting. One possibility is flattening the S$NEER slope to zero, especially since low inflation is only expected to rise by 0.7% in June. Concerns over inflation from potential U.S. tariffs could adversely affect the SGD, especially since it is commonly used in carry trades.

Monetary Policy and NEER Management

The MAS manages the monetary policy through its exchange rate strategy, which adjusts the SGD against a selection of currencies. It controls the S$NEER, which shows exchange rates with key trading partners, within a secret policy band. If the S$NEER goes beyond this band, the MAS intervenes by trading Singapore dollars. The MAS examines three factors: the slope, the level, and the width of the policy band. Modifying these elements can influence the strength of the SGD: the slope determines the pace of changes, the level allows for immediate adjustments, and the width increases market volatility. The next policy review is set for July 31. Given external trade risks and low domestic price pressures, we think there’s a high chance the MAS will ease their monetary policy at the upcoming meeting. Derivative traders might find it beneficial to buy put options on the Singapore dollar against the U.S. dollar, capitalizing on a potential decline in currency after the policy announcement. This perspective is backed by recent official data. In the first quarter of 2024, Singapore’s economy grew a modest 0.1% compared to the previous quarter, and core inflation fell to 3.1% in April, moving toward the lower end of official projections. These numbers give the central bank a solid reason to adopt a more accommodative approach to support growth.

Historical Context and Market Strategy

Historically, when the slope of the policy band has been flattened to zero, as seen in April 2016 and during the 2020 pandemic response, the currency has typically weakened. For instance, after the unexpected easing in 2016, the USD/SGD exchange rate rose over 3% in the following months. We expect a similar, albeit possibly more subdued, reaction this time, as the market has already factored in some easing. In addition to directional bets, we should consider the rising implied volatility in the options market for the SGD. An alternative strategy could be to buy option straddles, which benefit from significant price movements in either direction. This approach mitigates the risk of an unexpected policy hold while still allowing for profits if the central bank’s actions lead to a large shift in the exchange rate. The increasing use of the local currency in carry trades, as some analysts have noted, adds further downward pressure. If the central bank indicates a long-term easing approach, traders might borrow more in Singapore dollars to invest in higher-yielding currencies. This could lead to a further weakening of the exchange rate over time. Create your live VT Markets account and start trading now.

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