FxWirePro: USD/SGD may drop in short run but SGD’s strength unsustainable due to poor show of Singapore’s key business sectors

Singapore's CPI dropped to -0.8% from previous -0.4% which is not in line with consensus at -0.6% in August for the 10th consecutive month to the lowest since 2009. We think there is a non-negligible risk of Singapore slipping into technical recession following the weaker than expected industrial production numbers in July (-6.1%y/y). Singapore's key electronics and pharmaceuticals sectors are buckling under the combined weight of weak demand, both domestically and externally.

We continue to think there are significant downside risks to MAS's inflation and growth forecasts. MAS's 2015 GDP growth forecast of 2-4% appears a little too optimistic. SME business confidence underscores our concerns.

It is forecasted that USDSGD to hit 1.45 by Q4'15, 1.48 by Q1'16 and 1.53 by Q2'16. We maintain 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 the Fed begins its tightening cycle in December, as our US Strategists expect.