Tag Archives: SGDUSD

Indian Rupee – Real star or …

It’s a very interesting phenomenon every time SGD INR falls – people panic and there is a flurry of questions on SGD INR’s future. To me this anxiety is similar to a house owner checking on the market rate of the house they live, every week, and feeling sad if the latest transacted price in the neighborhood went down or celebrating if it goes up. In reality, this is just perceived loss/profit and is irrelevant unless the person is trading in properties and regularly buys and sells them for a living.

Anyway, leaving perceptions aside, lets look at how Indian Rupee has really performed against major currencies in the past 3 years before I turn my focus to SGD INR.

inr-summary

The Rupee has fallen against USD and JPY, against Chinese Yuan and Singapore Dollar its a flatline and the gains against EUR and GBP are not because Rupee has fundamental strength against them but because the 2 currencies have weakened due to their own issue – ECB monetary stimulus and Brexit vote respectively.

Also worth highlighting is Rupee’s inherent volatility where it went from 68/69 against the US dollar in Aug 2013 to 58 around Election time in 2014 and is back up at 67 mark – all in a matter of 3 years (refer comparative 1, 2 and 3 year charts at the end)

There is no doubt that the Rupee has been pretty stable in the past few months and the RBI has done a fantastic job of curbing the volatility in the face of BREXIT, expected US fed rate rise, Increasing Oil Prices,Redemption of FCNR deposits and escalating tensions with Pakistan.

But have the rupee or economic fundamentals changed to much in past few months? -I don’t think so.

India still imports 80% of its crude oil and as oil prices go up they would put a strain on the current account, the goods manufactured in China are still way competitive both in terms of cost and quality (maybe that’s why rupee is following the Yuan trajectory) and the NPA situation with Indian banks is still worrisome and could result in market turmoil.

Investing in NRE FD’s has generated stable returns depending on when one invested, refer – (https://adityaladia.com/2016/02/11/you-would-be-out-of-money-80-of-days-if-you-transferred-money-to-india-in-2015/) and would slowly stop being an attractive avenue as the interest rates in India go down.

Now coming to SGD INR, the current weakness is mostly due to flurry of bad news (or expectation management as I call it) on the economic and employment front. I have always maintained that the MAS is pro-active and lets the SGD adjust quicker to the market events as compared to what RBI allows or can allow with the INR.

All the expected or known negatives are already priced into Singapore Dollar and any other movement would be due to fed rate decisions. Even after the news of GDP missing estimates the SGD only fell around 1% which is very normal in the current volatile markets.

On the other hand there are a lots of factors for the Indian Rupee that needs to be priced in – merger of banks due to NPA’s, challenges for exports due to relatively strong rupee – China and other ASEAN countries, increase in crude oil prices, looming fed rate increase and of-course any escalation on the international borders with Pakistan.

As with the answer to keeping money in Singapore Dollar or remitting to India, the response is unique to every individual depending on their investment portfolio, diversification, cash flows and risk appetite.

48 would act as a very strong support and do factor in the cost of transferring money into India and remitting back, the cost of loan (if you are taking one) and tax obligations if you invest in property or stock markets when making any such decisions and don’t get stuck on specific numbers – transferring money at 49.80 is just as good as transferring at 50.

————————————————————————–
INR performance – past 1 year

inr-1-year

INR performance – past 2 year

inr-2-year

INR performance – past 3 year

inr-3-year

Advertisements

Indian Rupee is Overvalued and Chief Economic advisor agrees!!

Rupee is Overvalued and should depreciate – something I have been saying for 3-4 months now but for lack of time had not been able to do some research and share with everyone my thoughts behind the my assertion.

Reading the newspaper today I read Chief economic advisor Arvind Subramanian’s view as told to Economic Times,

“I think we have to be opportunistic, when there is a chance to allow it to drift down maybe a little bit it drift down but when lot of capital is coming in intervene to keep it stable,” Subramanian had said. “I agree that there is a part of the community out there that wants a strong exchange rate, but that would be very detrimental to our exports”

http://economictimes.indiatimes.com/news/economy/foreign-trade/government-hopes-rupee-reflects-its-true-value-finance-minister-arun-jaitley/articleshow/46695530.cms

The rupee has been stable against the dollar but has appreciated against a basket of currencies, severely effecting the exports competitiveness. India’s exports declined for third month running in February. Rupee has appreciated 22.4% against the euro in the current financial year. On a trade-weighted basis, and after adjusting for inflation, in February rupee was the rupee was over 24% overvalued against a basket of currencies of India’s six largest trade partners.

The below table shows the performance of Indian currency against major currencies and the Rupee has strengthened against every currency other than USD and Chinese Yuan, the direct impact of this strengthening is that exports to these countries be it Software, Services or Goods all become less competitive

INR comparitive chart 2015Now lets look at the competition – Countries that export goods and services to the nations above –  big ones being Indonesia, Malaysia, Brazil, Russia, South Africa and the currency of all these countries have depreciated against Indian Rupee giving an advantage to competition.

INR Comparitive Chart 2015 2I think it’s a perfect time for India to weaken the Rupee while Oil remains low to boost competitiveness of exports and fill up our foreign exchange reserves. At the same time build oil reserves so that even when oil prices move up we don’t have to strengthen the currency in tandem to prevent the outflow of petro dollars.

SGD @ 1.30 in next 3 months

“What? you must be kidding!!”

I know, I know – that’s exactly what my reaction was looking at the chart for SGD USD. I would not have bothered to look at the charts if not for SGD breaking 1.24 mark, specially not after the forecasts earlier in the year by leading financial institutions was for SGD USD to break the 1.20 barrier.

SGD forecast

The charts show an interesting trend – the one of SGD bottoming out and heading higher. Overlaying that with macro economic picture confirms the trend.

Now if you are wondering what has changed in just 2 months then I would say its just the feel good factor nothing more, other bits were in the making for long.

MAS provide guidance on SGD through monetary policy and the NEER bands for SGD but rarely suggests a target. The stance of MAS has not changed.

My hypothesis for reasons of SGD weakness primarily starts by looking at the bond markets. Singapore has a robust economy and reserves which make SGD government bonds literally risk free. In the past years money flowed into SGD Bonds seeking safety of capital. Also the property market in Singapore attracted a lot of foreign investors.

With the US stock markets on all time high, Nikkei on a bull run and general sense of economy looking better the capital has started moving from safe havens to more risky assets. I am guessing that the money if moving out of SGD bonds to equities here. Also with the latest government measures to cool down the property market some of the hot money chasing the properties in Singapore would be looking for other avenues. Both these factors mean that demand for SGD denominated assets would go down thereby resulting in lesser demand for Singapore dollars.

With the inflation well within Government targets and  falling fuel prices a weaker SGD augurs well for the economy – specially tourism and services sectors.

You would still be wondering what makes me boldly suggest a 1.3 target specially when the charts suggest a reversal at 1.28 and yes I agree I might have pushed a little too far with 1.30 forecast but markets are not always rational and tend to overshoot, nevertheless 1.28 certainly looks very real 🙂

 

10% Stamp duty = 10% move in SGD

The 10% additional stamp duty on all house purchases by foreigners in Singapore took everyone by surprise and thwarted the plans of buying a house for many a people. This was the second drastic attempt of the authorities to moderate the Singapore housing market after the sales tax charge of upto 16% on selling a house within 4 years brought about earlier in February 2011.

One would question why such an extreme measure was needed which made owning a house 10% expensive for foreigners.
A policy to gradually strengthen SGD has helped control the inflation since the start of the year. The exchange moved from 1.28 in Feb 2011 to 1.20 by Aug 2011 – a gain of 6%. This tamed the inflation  but did not have the desired effect to cool down the property prices.

On the flip side a strong SGD has impacted the exports of goods and services by making them more expensive. It would be worth mentioning that the Singapore Monetary authority uses Exchange rate as one of the means to implement its monetary policies.

Lets put some numbers around how exchange rate impacts the cost of housing and exports. Say someone wanted to buy a house worth 128,000 SGD in Feb 2011 (I know there is nothing available at this price) and there were others wanting to buy services worth the same amount. The cost in terms of USD would be 100,000 for either case.

Come Aug 2011 the same house was now costing 106,000 USD and the property markets were showing signs of slowing down. But the services that earn revenue for the economy and also generate employment had gotten expensive as well.

In the backdrop of slowing global economy organisations would look to move to cheaper destination to source the same goods and service. So to stay competitive something had to give way and in this case it was SGD. With the currency moving back to 1.28~1.30 range the situation turns back to Feb 2011 with the potential of housing market starting the upward journey again.

Housing is a cost of living for the residents of Singapore and rising rentals and property prices has contributed to employees looking for higher salaries to cover costs. Higher salaries again result in net higher cost for the employers.

So the next logical step was to introduce a deterrence for the foreign money chasing the Singapore property and here we have a property tax.

Possible Scenarios

The scenario could now play in 2 possible ways – Let the SGD move around the 1.30 mark or let it depreciate a little more to 1.35 range (same as 2008-2009 levels)

SGD stays around 1.30

With this new tax the same house now costs 110,000 SGD for a foreigner but the cost of services and exports stay put at 100,000.

SGD moves to 1.35 mark

If the SGD moved to 1.35 the same house would cost 104,000 USD. This would bring net cost of a house for a foreigner back to the Aug 2011 levels achieving the same impact as SGD trading at 1.20 against the USD but the exports and services would be only 95,000 USD making Singapore very competitive against other Asian countries plus the 10% revenue that the government earns from the tax could go towards benefitting the residents or tax subsidies to the companies.

So all in all the range I see SGD moving in next few months would be 1.27 to 1.34 against the USD depending on how the global events turn i.e. a 3% move either side of 1.3 mark against the USD