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.