FxWirePro: Recent SGD strength seems unjustifiable, gains on USD weakness - Short NDFs against Asian currency peers

An overvalued FX rate and a central bank that is slow and reactive to the downside risks to its forecasts keeps us comfortable with an underweight SGD view.

The combination of low implied volatility and low yield renders SGD as a very attractive funding currency for high yielding Asian FX and we expect SGD underperformance to become more entrenched in the longer term, particularly if Fed Funds hits 1.5% by end 2016.

SGD strength this year has mainly been on the back of dollar weakness, rather than based on domestic merits.  

The S$NEER is trading back above the midpoint of the band. Adjusted for inflation, the real effective exchange rate is elevated given the stage of Singapore’s economic cycle, and needs to be weaker, in our view.  

Though we do not expect MAS to change their policy stance at the upcoming April review, further easing beyond that cannot be ruled out. The market seems to be under-pricing this

The three crosses that we have chosen account for a 3rd of the S$NEER basket. For SGD/CNH, with the daily CNY fixings now largely following movements in the USD versus a basket of currencies, CNH should gain from any further dollar weakness. But the downside in CNH should also be limited given Chinese policymakers’ preference to avoid large depreciations.

We see SGD strength as being overdone. But we also acknowledge the risk of further USD weakness. Hence, we prefer selling selected SGD crosses to take out the dollar risk. Therefore, we recommend the following trades:

Short 3M SGD/CNH forward at 4.7785 (spot reference 4.7659) , targeting 4.6950 with stop loss at 4.7885.

Short 3M SGD/MYR forward/NDF at 2.9977 (spot reference 2.9884), targeting 2.9575 with stop loss at 3.1150.  

Short 3M SGD/IDR forward/NDF at 9750 (spot reference 9656), targeting 9500 with stop loss at 9850.