As expected, MAS held off any more easing as the GDP numbers were better than expected, SGD quickly jumped back to below 1.36 and I expect it to go below 1.35 in days to come.
There are 2 very interesting and informative info graphics that were published in Business Times on 12th and 13th April that I am sharing with every one who are interested to know how does NEER work and monetary policy is administered.
Ever since the Prime Minister Modi came to power the feel good factor about Indian economy and India has increased dramatically. All Indians, including me, are rooting for improved Indian economy – infrastructure reforms, streamlining of tax code, improved law and order and not to forget getting back the black money stashed in overseas accounts. The expectation also is for the Rupee to strengthen as reforms kick in and help kick-start the much-anticipated economic growth.
The past few months have seen the pair oscillating between the 46-49 range and the volatility in the forex markets has been nothing short of a roller coaster ride. The pair dropped all the way to 46.5 after the elections and bumped back up towards 49 only to test 46.5 again as the oil prices slid in the international markets (I was expecting a 45 floor as mentioned in replies to questions in the previous post).
INR has weakened against the USD to 63 as I had written earlier in (SGD INR: Post Election Euphoria) but interestingly SGD has also weakened in tandem. At one point in time the fall in SGD was greater as compared to INR and caused SGD INR to test 46.5.
Oil has fallen dramatically in the past few weeks and raised concerns of Central Banks not being able to meet their inflation targets prompting talk about monetary easing. A falling oil is good for India’s Forex reserves which has lent some support to the Rupee. On the other hand though the market sentiment remained weak as India’s trade deficit widened to one-and-a-half year high of $16.86 billion in November due to over six-fold jump in gold imports. Trade deficit in November last year was $9.57
billion.
The key events in play as I write are:
Falling oil prices can make the FED hold on to rate hike and also bring strength to SGD as the safe haven theory comes back into play. My expectation is for the Singapore Dollar to appreciate back to sub 1.30 level and Indian rupee to move upto 65 level which would bring the SGD INR back at the magical 50 mark in time for Singapore’s 50th birthday
Time flies and it’s already June – I can’t believe that the last I wrote about INR was in February and whole world was speculating on the outcome of the Indian elections. I did not expect the BJP to win with a full majority given the polarisation of votes, combined with regional politics and was expecting a hung parliament.
Based on that I had predicted that the Rupee would fall back to the 63 mark against the USD and 50 against the SGD (SGD INR: A storm in making). However, to my delight, the BJP did get a full majority. This meant that the uncertainty of a hung parliament and issues cropping up from coalition government were instantly non issues.
The markets reacted favorably to a government formed by progressive and reform oriented leaders and pushed the Indian Sensex to all time highs of over 25,000 and Rupee appreciated quite quickly to the Rs.58 mark against the USD. With many a Indians residing in foreign countries who remit money to India the obvious question was – Is the rupee headed to 55 against USD and should I transfer money to India now?
My answer to many such questions was – “the fundamentals of the economy don’t change overnight just with a stable government and the real effect of policy changes would take months to materialise and I still expect Rupee to stay over the 60 mark against the USD”
One of the first places to start when looking at fundamentals is Implied Exchange Rate calculation. Over the past years the spot rate has tended towards the Implied Rate Line (chart below: using SGD INR)
and the calculation suggests that the SGD INR would move back towards the upward trending implied exchange rate line as the RBI is going to hold the interest rates steady – the inflation is still alarmingly high.
Other factors that would be playing against the Indian Rupee would be:
1. Crop losses due to el Nino weather changes
2. Increase in price of crude if the tensions in Iraq escalate
3. Global slow down in the background Ukraine crisis and escalation in South China sea
As I write the Indian rupee has already crossed the 60 mark against the USD and 48 against the SGD and I maintain that the INR would move towards the 63 and 50 mark against the USD and SGD in coming months.
It’s a new year and right about time to do a pulse check on INR for the coming year. The past few months I was very busy at work and with the currency being relatively stable I did not want to write something just for the sake of writing. As mentioned in the October post the currency stabilised in the last quarter of 2013 and stayed well within the 60-65 range against the US dollar and hovered around the 49 mark against the SGD (INR – Directionless in 4th Quarter)
One would have expected things to remain calm for a few more weeks in 2014 before the Indian Budget and upcoming elections in March and May respectively but the global markets had something else in mind.
The Federal Reserve started the much-anticipated tapering of Quantitative Easing (QE) in December, with reducing the Bond purchases by 10 Billion USD a month to 75 Billion and followed it by a reduction of another 10 Billion in January 2014 which spooked the emerging markets.
Turkish Lira and Hungarian Forint were aggressively sold off and the Argentinian Peso is unofficially devalued. The data from China is not exactly exciting and Indonesian Rupiah and Thai Baht have their own set of problems to deal with. At the same time the RBI came out and surprisingly increased the benchmark rates in January announcements which I thing was more of a pre-emptive move to shore up defences against any potential sell off in the Rupee. With such weakness in the other Emerging market currencies the Indian Rupee, I must say, held ground very well.
But this is just the start of the year and there are quite a few events lined up in the coming months that would determine which way the Rupee moves. On the global macro side the course of Global Financial Markets a.k.a. the pace of QE would drive the general sentiments towards emerging markets. On the domestic front The Indian Budget announcements and the general elections would be the key determinants.
Looking at the global front I do not expect the federal reserve to stop tapering and ultimately end the QE program unless there is definitive bad news on the US unemployment and inflation. This reduction in QE would be Rupee negative and as in May – Aug 2013 time frame has the potential to push the Rupee down.
On the domestic front anything short of a stable government with full majority would be a negative for the markets. I think that this stage there is no one clear party that I could say would achieve the majority.
So in the short-medium term of next 3-4 months the chips are stacked against the rupee and I do expect it to touch trade towards the 65-67 mark.
What that does to SGD INR? Well the SGD has slightly weakened against the USD and has been trading at 1.27-1.28 area. Deteriorating global fundamentals tend to result in strengthening SGD as a safe haven currency. So with the expected weakness in the Rupee and potential appreciation of the SGD, SGD INR could march back to the 53 mark in the coming 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.
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 🙂
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
Aditya Ladia 