Slower economic momentum likely to weigh on SGD spot

Singapore's GDP growth rate is expected to slow down in 2015 due to fall in exports and labor force. The slower economic momentum is likely to weigh on SGD spot for the rest of the year and analysts believe forwards have not fully priced in the weaker fundamentals. 

Bank of America expects S$NEER to trade close to the mid-band with a weakening bias in August. The S$NEER divergence from the mid-point recently moderated from the highs of 1.2% traded in June after economic data disappointed. 

Bank of America states, "Our base case is for the Monetary Authority of Singapore to maintain its current weak S$NEER appreciation policy at its next scheduled meeting in October, especially given its persistent concerns about wage cost pressures. But there is a non-negligible risk of policy easing if a technical recession materializes. Benign headline and core inflation will give the MAS room to ease if necessary."

Bank of America suspects the economy to encounter following risks:

• 1) Domestic interest rates could increase sharply on Fed rate hikes and expectations of a weak Singapore dollar
  
  
• 2) the search for high productivity growth could fail
  
  
• 3) tightening of foreign worker policies could hurt GDP and employment growth significantly