FxWirePro: The fundamental driving forces of USD and EUR shorts against SGD

The flurry of bearish streaks of USD against SGD seems to have been halted at the recent lows of 1.3346 levels. But it has shown vigorous slumps from the highs of 1.4545 levels since the beginning of this year (Jan-2017), a considerable more than 7% within a span of nine months approximately.

While EUR is performing the other way round, gained from the lows of 1.4802 levels to the recent highs of 1.6308 levels, but in the current month bears have trimmed its gains to the current 1.5387 levels.

We expect the MAS to keep the slope, midpoint, and bandwidth unchanged at their semi-annual policy meeting in mid-October.

With regional central banks either neutral or dovish, there is no urgency based on the economic data to force the MAS into being the first mover, especially with uncertainty as to the timing and magnitude of slower growth in China. As such, a wait-and-see approach seems prudent.

A neutral tone to the policy statement is our base case and we believe there is a low probability that the commentary would allude to tighter policy in the future (i.e. at the April meeting).

SGD NEER is trading almost 100bp above the midpoint, making short SGD NEER basket trades or short SGD relative value exposure increasingly appealing.

It is believed that SGD would be a regional underperformer and should be used as a funding currency. The chance of the MAS tightening policy is very low and instead we assign a 70% chance that the midpoint of the SGD NEER will need to be re-centered over the coming years. Thus, we advocate initiating shorts in USDSGD futures of mid-month tenors, while buying eq-weighted basket of EURSGD puts.