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 4th 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
- capital investments by MNCs setting up RHQs and OHQs in
- foreign companies listing on the SGX
- the fact that
- abolition of estate duties, makes
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.
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