For one thing, the dollar will be a good proxy for growth as the Singaporean authorities attempt to dampen inflation. Unlike most western economies, Singaporean monetary policy revolves around exchange rates rather than interest rates: because the economy is so export-driven, pushing up the value of the dollar is a more effective dampener on prices than an interest rate hike would be.
The currency’s so-called “managed float” adopts a “basket, band and crawling” (BBC) policy. This means that the MAS first creates a basket of currencies against which the dollar is measured. This is weighted by Singapore’s trade dependence on the country. Next, the authority decides upon a midpoint that is used to calculate the 2 per cent band within which the currency can move. And, finally, during the biannual meetings at which it sets the midpoint, the MAS also decides whether the midpoint will be allowed to appreciate, depreciate or stay neutral.
Because of Singapore’s strong growth and the threat of inflation – forecast to be 2.9 per cent this year – RBS’s Andy Ji highlights that the MAS adopted an aggressive stance at its most recent April meeting. It both raised the midpoint around which the 2 per cent currency band is calculated, and shifted from holding the midpoint at a neutral level to enabling it to appreciate at a controlled rate (see chart).
There is no reason to think the authority will change the policy at its forthcoming meeting. Ji says: “Barring any extreme situation in the global economy, we’re going to see a very steady appreciation in the dollar. Liquidity is very flush because the good prospects for the economy attract a lot of inflows. Also, against the regional benchmark, Singapore has performed well, which also instils confidence.”
Favourable monetary policy and good growth is reflected in most analysts’ bullish stance: Deutsche Bank, Standard Chartered and RBS all forecast that further Singaporean dollar strength lies ahead. And with Standard Chartered’s end-of-year forecast for dollar-Singapore dollar (given at 1.35 in July) already reached, it’s likely that we have a long way to go before we hit the peak.