By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
Why SGD Bulls Should Take a Backseat on MAS
“Don’t underestimate the value of doing nothing …” – Winnie the Pooh
Restraining SGD Bulls
To be clear, we are not insisting that SGD bulls take Winnie the Pooh’s word “(not to) underestimate the value of doing nothing”. But it is poignant that the MAS’ widely expected hold at the upcoming bi-annual monetary policy meeting on 14th April is, in a sense, a reflection of the eclectic wisdom in Pooh’s counsel. And current circumstances around; i) MAS policy,; ii) $SNEER valuation and; iii) potential USD inflection, reject the notion that this MAS meeting will be anything close to an occasion for “second wind” amongst SGD bulls. Quite to the contrary the confluence of factors warn even the most optimistic of SGD bulls exercise restraint.
(Put off by) Prolonged Accommodation
For one, as set out in our MAS preview published earlier this week (please see Mizuho Insights – MAS Preview: Unhurried & Unfazed, 6th April 2021*), the MAS appears to be set for a prolonged hold; at least up till April 2022, if not longer. That is to say, with S$NEER policy bands set to be static, with 0% slope appreciation, there is no compelling case to aggressively bet on S$NEER appreciation, and by extension SGD appreciation (assuming all else equal). Point being, SGD bulls recognizing prolonged policy accommodation must be put off.
And even for the sceptics who refute that the unprecedented negative output gap may require an unexceptionally long period of flat S$NEER accommodation, bullish SGD bets make for very uncompelling, if not unattractive, risk-reward proposition.
Snubbed by Rich S$NEER
Simply because the starting point of a rich S$NEER, which our S$NEER model suggests is in the ballpark of 120-140bps above the S$NEER mid-point in April, points to significantly constrained policy headroom (~60-80bps, assuming ability to exploit all of the +2% allowance on the stronger side) for the trade-weighted SGD to appreciate from in the near-term. Barring a step appreciation of the S$NEER policy bands (mid-point shift higher), which is very unlikely given the depths of the pandemic downturn in the context of a bumpy and uneven recovery path ahead, S$NEER policy headroom (and scope for consequent SGD out-performance) will remain very limited near-term.
Even in the unlikely event that the MAS hints at appreciation bias being reinstated as early as October, which by all means is a bullish surprise, a calibrated reinstatement only squares with an additional 1% headroom for the trade-weighted S$NEER to appreciate spread over 12-months (<0.1% per month!). Not the stuff to get SGD bulls riled up, when they literally have nowhere (above) to charge.
Dominated by USD (Smile Inflection)?
By our own admission, SGD appreciation (against USD) is mostly a function of broad-based USD moves rather than S$NEER intra-band shifts. As an illustration, of the 4% appreciation in SGD since mid-2020, only 0.6%-pts is accounted for by S$NEER strengthening within the policy bands. Whereas USD weakness made up the other 3.4%-points. And so, SGD bulls might be tempted to argue that a weak USD trend is tailwind for bullish SGD bets. But there are two arguments against that.
First, the risk that ‘USD Smile’ may be at an inflection point (from the “left-half” to the “right half”), which is to say that the underlying USD dynamic shifts such that USD starts to rise on an improving global economy; diametrically opposed to USD depreciation in tandem with condition. Second, and critically, given that a rich S$NEER by definition undermines the ability of the trade-weighted SGD to out-perform, expectation for a weaker USD trend may be better exploited with other currencies depending on one’s risk proclivities.
Upshot being, SGD bulls will be misguided to bait this MAS meeting for less dovish than expected rhetoric.