USDSGD...........what do we do with a one-way street?

Let’s look at the USDSGD exchange rate in the last 5 years to better understand where we are today and where we may be going in the future. The last 3 years takes into account 2003 to 2006 and we will discuss 2007 separately as we are only into the first quarter.

Appended below is some interesting numbers: -

However, what does these exchange rates mean to us except that the SGD is strengthening against the USD through time, except for 2005. Why?

In order to gain a better understanding of this, we need to reflect the exchange rates to the health of the respective economies during this same period. A good proxy would be the Straits Times Index and the Dow Jones Industrial Index. Take a look at the comparison charts below: -

The index charts gives us an indication of the relative economic health of both Singapore and the United States. In the trough of the recession in 2003, the USDSGD was trading at 1.7880. By the end of 2006, the economic growth of Singapore pegged a GDP growth of 7.9% against the U.S. at 3.4%. We acknowledge that the economy of the U.S. is much larger compared to Singapore, however, on a relative adjusted basis, Singapore clearly outpaced the U.S. Therefore, the strength in the Singapore Dollar reflected the economic health of the country on a trade-weighted basis.

So where are we today? The current USDSGD is 1.5150, where do we go from here? Singapore is forecasted to grow at 6.5% p.a. for 2007, whereas the U.S. is forecasted to grow at 2.4% p.a.

Singapore’s economy is strong and continues to grow with considerable inflow of capital investing in businesses and real assets like real estate. Given the continuing inflow of capital, the Singapore Dollar can only get stronger through time. The housing market is experiencing a short-term ‘boom’ after being in the doldrums the past 7 years.

On the other hand, the U.S. is presently in a state of ‘stagflation’, where inflation is rising and growth is declining. It also has a huge deficit that doesn’t seem to have a solution to cure it. The housing market in the U.S. is weakening and in the sub-prime market……….a meltdown.

Now, looking at 2007 year to date; the USDSGD started out the year at 1.5328 and it is now 1.5150. Our original forecast back in the second half of 2006 called for USDSGD to range between 1.50 and 1.55. I believe we will reach 1.50 within the next three months.

What is our outlook for the rest of 2007? We believe USDSGD will move to an all time high of 1.48 before it levels out. We are not forecasting gurus here nor do we have a crystal ball, however, looking at the relative economic growth rates, the healthy growth in Asia, the strong capital inflow into Singapore, it is not difficult to imagine that we could see 1.48.

What is the conundrum facing the Singaporean investor? The world is getting smaller which is why we went from defining the world as ‘international’ to ‘global’. Therefore, we can’t just look at investing in Singapore alone; the last recession taught us that we needed to diversify our wealth pie globally. Like our government, it doesn’t keep all its wealth in Singapore dollars, it has diversified into a basket of currencies including; EUR, JPY, USD, AUD and NZD.

Our recommendation if you are holding too much USD is to begin diversifying out of USD or dilute your exposure to USD. You can do so by moving into Euro which is a natural hedge against the USD and also against the SGD. In fact, the Euro strengthened against the SGD from 1.99 to 2.04 and it is currently at 2.02. Another alternative is to hedge your USD exposure by buying an option (very much like buying insurance) to insure against any further erosion of your USD holdings.

Please feel free to post your comments or queries and we will be happy to respond to them. You may also contact us at The Panthenon Group at Tel: (65) 6835-8667 to discuss with us your individual and specific issues or situation, we will develop a solution for you.