The Monetary Authority of Singapore's unchanged stance implies little change in the medium-term outlook for the Singapore economy. The decision to leave the policy band unchanged was only partly expected by the market.
As such, USD-SGD made a c.0.8% knee-jerk move lower after the announcement. As per SGD NEER model, it is now trading 1.0% into the weaker half of the policy band, versus 1.6% previously.
In the very near term, further weakness is expected in USD-SGD as position liquidation continues. A gradual SGD weakness is likely to emerge in the next few months given continued broad USD strength.
However, a downside risk is seen to the current USD-SGD forecast trajectory of 1.44 for mid-2015 and 1.36 for end-2015 given today's policy move.
"We expect SGD rates to fall and the curve to steepen on expectations of FX appreciation. Since early 2015, the SGS and SGD IRS curve has flattened abruptly by c.40bps, and we think this is a good level for our steepener call. Given no change to the MAS' policy band and slope, we believe the UST/SGS spread can test negative territory in the near term, based on our call for SGS outperformance", says Standard Chartered
