FxWirePro: Fundamentals & US-China Trade Tussle Boosts SGD Strength – Deploy ATM Instruments To Hedge

Singapore's industrial production for June fell more than expected by -6.7% yoy. This was dragged down by lumpy items such as the biomedical segment.

However, there were some encouraging signs as the electronics sector rose by over 17%. This is an important swing factor for the economy and could also indicate a potential bottoming in the electronics cycle. This will be positive for the other key electronics exporters in Asia such as South Korea and Taiwan. In terms of implications for Q2 GDP, we could see a slight downgrade from the advance estimate of -12.6%.

In any case, the economy is still expected to contract by around 8% this year, below the government’s -4% to -7% projection. For USDSGD, it is seemingly in a tug-of-war between USD weakness on the one hand and downside risks for SGD due to the US-China tensions on the other. For today, USD weakness is dominating with USDSGD dipping to the lower end of the 1.38 - 1.40 range of the past two months. Given the uncertainties surrounding CNY, we would be cautious in looking for much lower levels. For USDSGD, we could foresee more downside risks on the cards in the days to come. Hence, we advocate 1m ATM -0.49 delta put options to arrest bearish risks. One could observed the pay-off structure as and when the underlying spot FX keeps dipping. Courtesy: Ore & Commerzbank