Weakness of the USD…………………………

Looks like the world has come to terms that the USD is not the preferred currency to be holding, especially since, all other major G7 currencies has cut their interest rates aggressively to within or near the 2% range; Switzerland at 0.50%, EU at 2.50%, U.K., at 2%, and Canada at 1.50%. Australia and New Zealand are higher at 4.25% and 5%, however, it is their historical lows.

The U.S., on the other hand has cut interest rates to near-ZERO!..............pretty much like Japan and we know what has happened to Japan for the past 14 years.

The Federal Reserve clearly acknowledges that the U.S. is in a deflation with the recent interest rate cut to 0.25%. It also suggests that the Federal Reserve has exhausted using interest rates as a monetary measure/policy. The action also affirms that inflation is not a concern now that deflation has become a reality and the recession a bigger problem.

It is left with fiscal policies to work with to stimulate the economy which is why the potential US$2Trillion expenditure…….huh…….deficit……….. by the impending Obama’s administration over the next two years. It might just work……….like the days of Reaganomics………..spend and spend and spend…………spend your way out of a recession and simultaneously, build a record high deficit. This was what happened back in the decade of the 80s under Reganomics…………till the bubble burst in 1990, and Bill Clinton ‘aka the Laundry Man’ came in to clean up the mess.

The lack of confidence by the American public is overwhelming with rising unemployment and falling real estate prices………….people just get scared and become paralyzed and it is going to get worse in 2009.

Corporate earnings announcements in Q1 2009 will be horrific and will send the stock market into the basement. We have to remember that though the current prices are attractive, however, based on future earnings, the price levels are still high. We must always remember that the price of a stock is the future cashflows discounted back to net present value.

We believe the worst is yet to come for the U.S., and the economy may hit rock bottom by the end of 1H 2009. At that time, opportunity will present itself for the brave and sophisticated to ‘dive’ back into equities at low low prices and then ride the roller coaster ride back up.

What that means for the U.S. Dollar is that it will probably continue to weaken till the middle of 2009, thereafter, when gold is exchanged for US. Dollars to buy into equities and foreign funds start investing back in the U.S. stock market……..the U.S. Dollar will strengthen!

USD/SGD to range between 1.51 and 1.60 in year 2009

In October 2008, MAS adjusted the NEER – Nominal Effective Exchange Rate curve from an aggressive position to a more neutral position in line with the current financial and economic environment.

Singapore posted its first negative quarter in Q3, 2008 of -0.5% with manufacturing taking a big hit of -11.4%. Expectations that Q4 will also be a negative quarter will put Singapore into an official recession.

Of course, the government is already articulating that Singapore is in a recession to pre-empt the expectations of Singaporeans and businesses in Singapore.

The Singapore governments’ proactive S$2.3Bn economic stimulus package will benefit SMEs and commerce in 2009 and help to soften the recession.

Singapore has been experiencing large capital inflows from businesses wanting to set up in Singapore as a preferred first world country. We are also experiencing large capital inflows from foreigners who desire to be PRs and citizens; they are moving their businesses here and also setting up home here. The Singapore real estate scene has benefited from these capital inflows.

This has kept the Singapore Dollar relatively upbeat vis-à-vis, the declining economic situation and environment. The huge amount of liquidity in Singapore has kept interest rates low which is helpful in an impending recession. Of course, with low interest rates, investors are compelled to move monies into better opportunities like real estate investments and equities. This has explained the relative resilience in the real estate market and the equity market.

Like we articulated in our previous post, we believe the USD/SGD will close 2008 in the range of 1.51 and 1.53. The outlook for 2009 is somewhat unclear at this time.

Too many factors are involved and it is a juggling act at this moment in time.

We believe that we will have a clearer picture as the first quarter of 2009 unfolds. In the meantime, with the collapse in commodity prices and prices of basic food items, inflation is capped and in fact is coming off. This puts Singapore in a good position to keep interest rates low to encourage economic activity. The local banks being well capitalized, will also be in a position to extend credit, that is, if they have the appetite to do so which we will see as time progresses into 2009.

Given that for some unexplained reason, USD has been identified as the safe haven currency………..why……..we cannot explained it. However, we believe the market appears to be acting irrationally, we suppose it is because the USD is the default world currency. However, that in itself does not support this view.

We believe there are still large amounts of leverage yet to be unwound. We saw the first tsunami wave of deleveraging from August to October and the chaos it caused all around the world.

We believe there will be another wave of deleveraging during the first quarter of 2009 which could possibly give more strength to the USD against all G7 currencies including the SGD.

Once we have a better feel of what is happening after Q1, 2009, will we be in a better position to fine tune the USD/SGD range.

USDSGD likely to close in the range of 1.51 to 1.53 year end 2008.

The strength of the USD against all other G7 currencies and also the SGD took everyone by surprise given the financial crisis that the U.S. has been facing the past quarter.

In our last blog article, we shared with you that there are five reasons that explains the strength in the U.S. Dollar. Two of the reasons have proved to be more significant in the last two months: -

The repatriation and deleveraging are still on going and the economic status of other G7 countries and Singapore relatively to the U.S., has changed drastically.

Repatriation and deleveraging - We have experienced very strong capital flows going back to the U.S., flows that are triple that of the monthly average in the past five years. Many U.S. companies are bringing back U.S. Dollars to shore up their capital base and to defend the company. These fund flows are a combination of both unleveraged flows and also leveraged flows and it is impossible to determine the ratio between the two except to say that leveraged flows are probably the larger of the two. The U.S. has been living off credit for the past 30 years. It is estimated that credit as a ratio to capital base in the U.S. has increased by more than 10 times in the past 30 years. There was and is considerable borrowing in JPY because it has the lowest interest rates. The unwinding of the leverage would mean the buying of JPY and the selling of USD which explains the strength in the JPY by 15 big figures from 111 to 95.50. Please beware that the deleveraging is not completed yet. We have only experienced the first wave of deleveraging, and we suspect that there will be another ‘tsunami’ like deleveraging during the first quarter of 2009.

Relative comparison in economic health between Singapore and the U.S. - Shocking news of Singapore negative third quarter GDP numbers clearly sent out strong signals that Singapore’s position as a recession proof economy crumbled. The manufacturing sector which is an engine of growth for Singapore posted a negative 11% in Q3. The GDP forecast outlook for Singapore has been adjusted from 2% to 4% to -1% to 2% for 2009. The saving grace for Singapore is our strong surpluses and capital inflow from foreign companies setting up businesses in Singapore. Do bear in mind that the public arena has been talking about a recession in the U.S. for the past seven months. The first talk of a possible recession in Singapore was this month just prior to the GDP numbers to be announced by the MAS.

The above two reasons itself will give USD strength to keep in the range of 1.52 to 1.55 during the first half of 2009.

Where will USD/SGD be for the rest of 2009, please continue to stay tune in to our blogsite.

Our sister company, HWH Inc. will also be posting an article on our outlook for Singapore equities shortly at; www.hwhglobal.ning.com

USD/SGD readjusted to 1.36 from 1.33

Why did the U.S. Dollar strengthen against all majors in the month of August? Definitely not because the economy is doing well……it is in terrible shape! Definitely not because of the banking and financial industry on Wall Street…………it is a total mess!

The U.S. Dollar strengthened in the last month because of the following reasons: -

1. U.S. dollar repatriation, the capital inflows for the month of August was unusually large compared to same period in 2007.
2. Fall in crude oil prices. Whenever crude oil prices fall, the U.S. Dollar will strengthen, this is because crude oil is traded in U.S. Dollars, everyone around the world will need to buy U.S. Dollars to buy crude for current needs and buying into the futures.
3. Recent acknowledgement that other parts of the world are also experiencing a slowdown in economic growth.
4. Rumours that the U.S. is not in a recession and that it is in a better state of affairs than most people think.
5. Rumours and talk that the Federal Reserve may raise interest rates after 17 cuts down to 2% which a lot of people on Wall Street are starting to think is the blame for all the monetary excesses.

All the above reasons have helped fuelled the U.S. Dollar’s phenomenal rise against all major G7 currencies from the middle of July and the whole of August.

The fact remains that the United States of America has the following fundamental problems: -

1. Domestic current account deficit
2. External current account deficit
3. Current chaos in the banking and financial industry
4. Underlying fundamental economy is in recession
5. Election time and change of guard – new president
6. Falling real estate prices
7. Rising unemployment
8. Rising inflation

All this means: -

1. Uncertainty
2. Gloom
3. Pessimism
4. Panic and fear
5. Defaults
6. Foreclosures
7. Unemployment

All this culminates to a ………………………WEAKER U.S. DOLLAR!

The reality of the U.S. is whether we look at it fundamentally, structurally, economically and politically………………it is going through major……. major life altering and country changing circumstances.

The U.S. Dollar short term strength in July and August is an aberration. The USD/SGD will move back to 1.36 by year end 2008.

We have adjusted our forecast from 1.33 to1.36 purely on the basis that there is still considerable repatriation yet to be completed. However, the fundamentals will speak louder at the end of the day.

Our sister firm, HWH Inc., will be issuing a ‘Clear and Present Danger’ article discussing the current situation, future ramifications, but more importantly, strategies and recommendations to navigate through these difficult times. It will be circulated to all its clients investing friends, should you wish to have a copy of this article, please email; enquiry@hwhinc.net for a copy of this article.

A Rate Hike from the Fed in the near future is ‘zero’ possibility!

The Federal Reserve through two actions yesterday sealed its fate as far as raising interest rates in the near future.

In fact, its liquidity actions proves that the banking and financial markets in the U.S. is highly fragile and also that the U.S. requires financial support from external sources; the SNB and ECB.

Yesterday, the Federal Reserve announced that it will extend the repayment period for the repayment of its short term loans and extend more credit to banks and financial firms on Wall Street from its original expiry date of September 2008 to January 2009.

In a simultaneous move, the Federal Reserve also extended its credit facility with both the SNB and ECB for higher amounts.

What this also implies is that the U.S. Dollar’s strength will be capped and any move upwards should be an opportunity to sell the dollar. We believe the outlook for the U.S. Dollar relative to the other G7 currencies will be generally weaker over the next 12 months.

The Situation with the GSEs

The Federal Reserve and the government of the United States have a very serious and delicate situation to handle and manage amidst its own primary issue of a weak and slowing economy plus a government that has no money as it is running deficits in both its domestic and external current accounts.


Freddie Mae and Freddie Mac gave birth during the Great Depression of 1938 to help get the U.S. economy and country back on its feet. The government sponsored enterprises – GSEs bought over all the mortgage portfolios from the banks, thereby injecting liquidity back into the banking and financial systems.


Looks like now, the reverse is happening; the government and the Federal Reserve needs to come rescue the GSEs. When a government is running a negative current account, how can it help, accept to ‘print’ more monies……………further weakening the U.S. Dollar or sell more securities and pay higher interest rates or worse still just book a ‘credit’ entry in its ledger. The government does not have a choice; its guarantee is being called upon to perform and it has to be very careful the option it chooses to raise capital.


However, some lawmakers and fellow congressmen in the Congress are taking up issue as to the manner in which the GSEs have fallen ill. The objective of the GSE is to underwrite mortgage loans. In fact, it has underwritten US$5 Trillion of the total US$12 Trillion mortgage market. However, when its books grew to a very large size, it decided to securitize the loans to create more ‘room’ to take on more mortgage loans. In the process, it also decided to invest and buy some of these securitized mortgage obligations, otherwise known as CMOs or CDOs in order to enhance its dividend yields to investors who have purchased its securities.


The end result is leverage upon more leverage and when the underlying values of the mortgage values started to shrink, all of a sudden the entire portfolio went into negative equity. Then, the defaults began, and then the write downs followed.


The point I am making is that the ‘core lender’ of the mortgage market in the U.S. is ill and needs government intervention. The government and the Federal Reserve had already intervened in the banking and financial industry; look at how it had lent monies to JP Morgan to buyover Bear Stearns………..and at less than 10% of market price………what a joke! Good for JP Morgan………bad deal for Bear Stearns and also for the Federal Reserve.


In aggregate, what are we saying? The health of the U.S. economy is balancing on the high wire! The U.S. economy is predominantly a domestic market driven by both consumer spending and real estate.


Consumer spending has fallen dramatically, consumer confidence has at very depressed levels and for very good reasons; job prospects are bad, job promotions are bad, securing new jobs are bad…………and lots and lots of people are getting laid off!


The real estate market has been falling in value for the past 18 months and we believe the worse is still not over. The Federal Reserve and the Government has a very difficult task trying to balance growth, inflation, a depressed real estate market and a consumer with the lack of spending power.


This implies that the US Dollar is not about to go anywhere but southwards for a while. Interest rates are also going to be kept on hold for a while as the government and the Federal Reserve needs to fund huge amounts of monies to bail out the GSE and it hopefully desires to do that at low interest rates……………the saga continues…………

USD/SGD confirm to hit 1.33 by year end 2008

The Strong Singapore Dollar is set to achieve 1.33 by the end of 2008

Since our last blog article on the Singapore Dollar where we forecasted 1.33 for year end 2008, we are now more confident that this will be achieved even before the end of the year.

There are a number of reasons that supports the strong Singapore Dollar, namely;

• Strong capital inflow from foreign investments
• Strong NEER monetary policy to keep Singapore Dollar strong and to ward off inflation
• Strong capital inflow from immigrants making Singapore their home and country
• Relatively strong economic growth compared to other first world countries

There are also a number of dangers out there for Singapore which may negatively impact the Singapore Dollar, and they are;

• Inflation is spreading into wages and prices of our basket of necessities which escalates to wage price spiral, this is the worst sign of ‘runaway’ inflation
• Real estate correction

The strong NEER monetary policy is not coincidental, we believe Singapore has been battling with inflation for the past 5 years, it just didn’t seem so apparent because productivity was high. Now, the situation is starting to change.

Don’t we find it strange that the government keeps on announcing inflation at 2% each year for the past 11 years till December 2007, where it announced inflation at 3.5%, then in January 2008, it announced inflation at 4.6%, then outlook for the rest of the year is 7.5%. How can this be when inflation supposedly has been so stable at 1.8% to 2% for the past 11 years, fundamentals and the structure of the economy cannot have changed so dramatically in such a short time?!

The fact that the government has been raising the NEER monetary policy both on a parallel shift of the curve and also to widen the trading band through the years are clear signs that it was fighting off inflation.

Taking global inflation into perspective, almost every developed, developing and emerging country is experiencing inflation from higher fuel and food prices. The higher fuel prices is still something difficult to understand given that we have an abundance of crude, we believe it is more because of the complex speculation available through the futures market that has caused such a spiral in prices to US$140 per barrel. The rising food prices are really a function of poor weather and lower yields plus growing population around the world.

Comparatively speaking, even with significantly lower growth of 3.5% for the second half of this year, Singapore will still do better than most developed first world countries and with a huge current account balance and large national reserves, it is in a better position to weather a global downturn compared to the likes of U.S. and Europe who are running negative deficits.

Of course, what is the greatest concern at this moment is productivity in Singapore………….it is slipping and sliding downwards, and this maybe the knife at our jugular vein. It is alright to be more expensive cost wise as long as productivity is high, but this is not the case with Singapore today. More importantly, true and fearful inflation happens when it seeps into a price-wage spiral and it is happening in Singapore. We will need to do a further analysis to ascertain the possible medium term effects.

The U.S. is not about to raise interest rates in any significant way given the poor health of the economy. More importantly, the situation with the GSEs, plus the further weakening of the real estate market, plus the current account deficit, plus the sickly banking and financial industry, plus the weak and near negative growth all mean a very dangerous and explosive situation for the U.S. Therefore, the U.S. Dollar will stay soft for the rest of the year.

If you are holding on to more U.S. dollars then you care to hold, please begin to diversify into other alternate currencies like AUD, EURO, CAD and JPY. The CAD and JPY will prove to be good currency hedges as inflation continues to persist globally.

Of course, you can also invest in our USD/SGD Booster Protection Note, whereby, you give us your USD and we will return you SGD in 12 month’s time at a high rate than the current spot rate. For example, spot rate is 1.3585, at the end of 12 months we will return you in SGD at 1.4140 which is double US time deposit rates and also puts you in a better position to recover some of your losses from holding USD at previously higher exchange rates. This is the only value added proposition available in the marketplace.

We will be launching a tranche of the USD/SGD Booster Protection Note shortly and will email all of you.

Outlook for USDSGD in 2008

2007 has been a year where we have experienced USDSGD going on another rollercoaster ride, but the inevitable truth is that the rollercoaster ride is a declining ride, where the USDSGD started out the year at 1.5330 and ended 2007 at 1.4330. Compare this with 2006, where it started at 1.6620 and ended at 1.5330.

The weakness in the USD and the corresponding strength in the SGD is no surprise. Fundamentally, both countries are on opposite ends of the economic cycle. The US is slowing down and the risk to a recession is a real possibility. Singapore continues to experience strong growth in excess of 7% p.a., and for a matured economy this is amazing.

Inflation has been steadily rising globally which prompted the rising interest rate cycle starting from early 2006.

What is more important to note is that inflation in the US is about 2.6% p.a., however, inflation rate in Singapore is in excess of 10% p.a., though, the official rate is 3.6% p.a.

In the Singapore context of inflation, the government always affirms an annual inflation not exceeding 2% p.a. and this has been the stance for the past 11 years. Then all of a sudden, in the 4^th quarter of 2007, it announced inflation as being a concern because it is now above 3.6% p.a. More recently in January 2008, the government announced inflation to range from 4% to 6% for 2008.

I believe it is general consensus that the unofficial inflation rate in Singapore is well in excess of 10% p.a. This means that interest rates can only go up in Singapore in order to curb inflation. What this also means is that the SGD will continue to strengthen against the USD.

The interest rate cycle is somewhat more complicated as different countries around the world are adopting different policies and some appear to be difficult to understand. Take for example, the U.S., has aggressively cut interest rates by 75 bps in the past 3 months, the UK cut interest rates, ECB maintained interest rates, Australia raised interest rates, New Zealand cut interest rates and Singapore cut interest rates.

The Singapore Dollar has strengthened in order to ward off imported inflation as we import almost everything that we consume and use. What is interesting is that the Monetary Authority of Singapore has cut interest rates of SIBOR from 3.75%p.a. a year ago to the current 1.25% p.a. Economic fundamentals dictate that when a country cuts interest rates, the currency will generally weaken through time, however, this is not the case for the Singapore dollar………why?

The fact of the matter is that huge capital inflows is coming into Singapore, they take the form of: -

1. capital investments by MNCs setting up RHQs and OHQs in Singapore foreign investors’ monies investing in the Singapore real estate market
2. foreign companies listing on the SGX
3. the fact that Singapore has the lowest corporate and personal income tax structure for a developed first world country, attracts considerable number of people to migrate to Singapore
4. abolition of estate duties, makes Singapore very attractive ‘retirement’ destination

In early 2007, when USDSGD was 1.56, we called for USDSGD to fall to 1.48 before the year ended. Well, it hit pass 1.48 in August 2007 and closed the year at 1.4382.

When we were writing this article in January 2008, USDSGD was 1.4350, and we believe based on our analysis that USDSGD will move towards a target of 1.38 by end of 2008. Before, we could publish this article on our blog, USDSGD is now at 1.3848.

We have readjusted our forecast for USDSGD to 1.33 by year end 2008.

This being the case, our USDSGD Protection Booster Note becomes a very viable and powerful solution to the problem of an eroding USD. As more and more Singaporeans become global investors, it is normal to end up holding US Dollars in one’s investment portfolio. After all, 70% of all mutual and hedge funds are denominated in USD.

However, I am sure for a significant number of Singaporeans, if they had a choice, they would prefer to hold the Singapore Dollar.

We launched two successful USDSGD Protection Booster Notes in 2007, where clients gave us their USDSGD at 1.52 and at the end of 6 months; we returned their funds in SGD at the exchange rate of 1.57.

We will be launching another USDSGD Protection Booster Note soon to help investors and our clients recover in some way their eroding losses in the USD.

We also have our investors and clients calling for us to launch another Program 8 and Program 10 as they wish to move to more conservative investments.

We will be informing our investor base and our clients shortly.

The Subprime Saga continues..........

The full meltdown in the subprime market has not been fully disclosed nor fully felt yet. More importantly, the numerous repercussions to the global economies have yet to be fully translated…….that is pain to be felt by ALL.

All the recent announcements by the major banks writing provisions for subprime losses; Merrill Lynch at US$8.4Billion, Citigroup at US$11Billion and Morgan Stanley at US$3.7Billion, HSBC at US$3.4Billion, BOA at US$3Billion, Goldman Sachs at US$1.48Billion and UBS at US$3.4Billion. Goldman Sachs’s writedown is lesser than the rest of the market players even though it has the highest percentage of Level 3 assets is a testament of the great risk management done by GS. All the banks are playing a dangerous game.

What these major banks have done is ingeniously transferred an embarrassing problem from their balance sheets to ‘off balance sheet’. Potentially, it means that the banks can sweep even ‘more of the latent problems under the carpet’ given that it is now an off balance sheet item?! Yes, no doubt they are taking the ‘hits’ on the their bottom line profits this year, but then again, this year has been record breaking profit announcement for most if not all American financial institutions. So what is the big deal about writing off and making provisions for subprime losses?

The best part about is that if the situation improves, the banks can always write back in these provisions as profits or rather extraordinary gains…….and they become ‘heroes’ of the free world.

There is also the whole game of re-classifying assets moving it down progressively from Level 1 to Level 3 and then thereafter, writing it off.

Out of the entire estimated US$10Trillion mortgages in the U.S., about US$1.2Trillion is subprime mortgages and so far the world’s largest banks have only written down about US$60Billion so far. Would it be reasonable to assume that the subprime situation could progressively get worse through the next 12 months?

Even the former Chairman of the Federal Reserve, Alan Greenspan admitted that he didn’t foresee that the subprime issue could be such a significant problem. It is a serious problem as it is a structural weakening of the U.S. economy. There is no short term solution………only long term solutions with accepting and adapting to pain management.

What have been comforting in the past three months have been two strong initiatives. Firstly, the concerted global effort by all the central banks of the world to ‘pump’ liquidity into the financial marketplace to ward off a financial meltdown has been helpful. The total liquidity injected to the marketplace to date is about US$400Billion which is significantly more than the write offs. Does this tell us something?

Unfortunately, this cannot be the long term solution. Government cannot be made responsible for bailing out the greedy private enterprise/sector.

Secondly, the joint decision by the major mortgage banks, the US government and the Federal Reserve to ‘freeze’ mortgage interest rates for the next five years will provide relief to the marginal borrowers and reduce the need for foreclosures.

What is important is that within the next five years, the US economy has to move from its currency slowdown to a re-energized economy, otherwise, the situation of the marginal borrower and the value of the marginal property will not improve through time.

More recently, some of the big boys have invited new investors to come in with cash injection to shore up their capital base. Merrill Lynch is a case in point where Temasek bought a less than 10% stake in Merrill Lynch for a consideration of $5Bn.

The subprime issue is not over yet and we cannot discount it at this moment. We will be doing a more in depth research and will be coming out with an update in the near future.