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.