Its been a few months since I wrote about the pair as most of the discussions were in comments to previous posts, but today’s MAS decision warranted a new post.
There were ripe speculations that MAS is going to ease the monetary policy (which it did) and Singapore is headed for a technical recession. The economy expanded by a modest 0.1% much against the consensus of a contraction of 0.1%. The immediate impact on the exchange rate was a modest gain from 1.4025 overnight to 1.3960 as I write.
One would question that why has SGD strengthened even though the policy has been slightly eased? There are various factors at play:
- The expectations of a USD rate increase this year are negligible. I would be surprised if the Fed raised the rates in Dec when the volumes are thin due to holiday season. My personal view is that it was a missed opportunity in Sep and Fed should have increased the rates but that’s a different topic of discussion.
- SGD had fallen all the way to 1.43 in anticipation of easing, but recovered slowly over the past week with rest of the regional currencies. If one looks at the bigger picture then Indonesian Rupiah has appreciated by around 9% against the USD and Malaysian Ringgit has firmed up by around 6% in past 10 days. The key words for me from the MAS policy statement is “slow the pace of local dollar’s gain”
MAS will continue with the policy of a modest and gradual appreciation of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) policy band. However, the rate of appreciation will be reduced slightly. There will be no change to the width of the policy band and the level at which it is centered, saying it would seek to slow the pace of the local dollar’s gains versus its trading partners.
Both Malaysia and Indonesia are key trading partners for Singapore and a greater than 5% jump in their currencies diluted any chance of SGD depreciation. The intent of MAS Is clear – it wants SGD to be slightly stronger than its trading partners.
Now if one looks at INR it appreciated very quickly in after the US job reports from the comfort that no fed hike is on the cards. It was good news for FII’s who can pump money in Indian Bonds and earn good interest rate. Many mistake this as FII investment in India because if one looks at the economic indicators they don’t look very good – be it industrial production. agriculture produce or job growth.
I have said this many times and would repeat again – the sooner INR falls towards 70 the better it is for India. The Indian exports are declining due to competition from other countries with weaker currencies and the day fed hikes the interest rate INR could dip 2-3% overnight and that is not a pleasant shock for the economy.
Anyway for now no major events are scheduled in the coming months other that the results of the BIHAR elections. I believe irrespective of the outcome the Rupee is scheduled to fall post-election results. If BJP wins there would be a knee jerk appreciation which will fizzle out as the economic data and realities will take center stage. If BJP looses then Rupee would immediately fall from a sentiment perspective.
So for the next few weeks I expect SGD INR to be range bound between 46-48.
Well the news of India hitting sub zero inflation or more technically a deflation has been making rounds. The general sentiment around this news is negative, implying that its not a good thing to happen.
Before going further lets explore the economic definition of deflation.
In economics, deflation is a sustained decrease in the general price level of goods and services resulting in an increase in the real value of money — a negative inflation rate.
Now that sounds good. I definitely want the value of my money to increase and would be happy if i could buy things at a cheaper price. So why are people not happy about hitting deflation?
Well the real worry is that theoretically deflation is caused by fall in demand and in turn results in lower demand as buyers wait on the sidelines before committing to a new purchase thereby causing a deflationary spiral.
Before going any further lets see what is inflation and how is the inflationary figure calculated. Inflation is the increase in prices of a basket of goods over a period of time. So something that cost ed 100 units of currency costs 103 after a time period indicating that their is more demand than what supply can keep up with and purchasers are willing to pay more. This is technically supposed to prompt investment to increase supply.
Let me ask you this – what is the objective of increasing supply efficiencies? Simplistically speaking – to ensure there is enough goods that can satisfy the demand. If the demand matches supply then theoretically there should be zero inflation. So what growth is really aiming at is to eliminate inflation.
Looking back at historical data prices of a lot of goods have fallen absolute basis as efficiencies increased thereby prompting growth.
One classic example would be computers – just a few years back a PC with 1/10th the power costed around the same price as today. Same with medicines.
So I think deflation once a while is a good thing. It improves the purchasing power of money.
I like my groceries, cars, ipod’s, jewellary cheap and the house at an affordable rate (bet you do too!!).
So feel good that we are headed for a deflation and lets hope its not a deflationary spiral but just an adjustment of suppy, demand and prices.
The straight forward answer would be to say…lesser consumption leads to lesser demand leads to lesser production results in lesser green house gasses and in turn a cooler earth.
But digging a little deeper we find that the reduction in production is OPEC’s way to ensure that the Oil price atleast staibizes, around $45 mark if not march towards its recent glory.
So if falling prices are the motivation to reduce production then lower prices should also result in an increase in consumption, albeit with a lag. The general consumer is cautious given the recent super spike in oil.
If the prices remain subdued for a fairly long time, the consumers are bound to return to gas guzzling vehicles and heavy energy use.
Though we should remember that this time around there have been substantial investments and initiatives towards alternative energies. These should start to become commercially viable in a few years time (hopefully by the time next oil spike is ready to happen).
What we do not know is that how these alternative sources of energy would impact the global warming. In a few years time we might realise that the energy harvested from the oceans impacts the ocean currents which in turn adversely effects the weather pattern thereby increasing the global warming. There could be similar undiscovered effects using the nuclear energy, wind power, hydro power etc.
So if you want a “cooler” earth, reducing energy consumption is the only long term viable option!