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.