- Singapore economic outlook will be pressured by slowing global growth prospects
- MAS lowered Singapore's growth outlook - the currency may be next
- China's problem is Asia's problem - spill-over effects from the trade dispute
- Federal Reserve policy reverse signals another cycle of lower global interest rates
In August, Singapore's Ministry of Trade and Industry cut its 2019 economic growth forecast for a second time, reducing it to zero to 1 per cent, down from 1.5 to 2.5 per cent. The currency may be next, with easing likely at the Monetary Authority of Singapore's (MAS) policy review in October, according to UOB's Senior Foreign Exchange Strategist Peter Chia.
Second-quarter growth almost stalled, expanding 0.1 per cent, the slowest in a decade. Quarter-on-quarter performance was even worse, shrinking 3.3 per cent, reversing the first quarter's 3.8 per cent growth and raising the spectre of a technical recession, defined as two consecutive quarters of negative growth.
Singapore is not alone, as issues such as the US-China trade dispute, Hong Kong unrest and Brexit weigh on the global economy. The US Federal Reserve was forced to abandon tightening and revert to cuts, while central banks in Asia have already eased. As the MAS uses the currency, not interest rates, to execute policy, attention will naturally fall on the Singapore dollar.
"The Singapore dollar is too strong," Chia told clients at a UOB FX event on August 27. He predicts it will weaken to a three-year low of $1.41 in the next six months -- his "most convincing call."
The Singapore dollar is too strong...(and we) predict it will weaken.
In April, the MAS maintained a "modest" appreciation for the Singapore dollar, despite calling inflation "benign." That stance kept the Singapore dollar within the upper half of its trading band against a basket of currencies. The MAS may reduce its appreciation bias in October, Chia said
The China effect
Singapore has one of the world's most open economies, with trade a multiple of GDP. It is vulnerable to the escalating US-China tariffs, with both nations among its largest trading partners. Singapore's electronics industry is deeply embedded in China's value chain, and with no end to the dispute in sight, exports to the mainland are suffering.
The rest of the world offers little respite: Japan and South Korea have their own trade fracas; Hong Kong is besieged by protests; Europe is entering another slowdown, where even Germany is deteriorating; Brexit provides a constant negative for the UK; in the US, the risk of a recession in the next 12 months has risen to 32 per cent, the highest since the 2007-08 Global Financial Crisis.
"The world is experiencing slow growth - and it's getting worse," UOB's Senior Economist Alvin Liew said at the event.
A slowing Chinese economy amid the trade conflict is likely to hit other export-dependent Asian countries such as South Korea and Singapore...
Singapore's exports tumbled 14.6 per cent in the second quarter from a year ago. In response, the government slashed full-year projections to negative 8 to 9 per cent, from zero to negative 2 per cent.
Where the Chinese yuan goes, Asian currencies will follow
After initially defending its currency amid the trade tensions, China allowed the yuan to drop beyond the psychological 7.0 per dollar on 5 Aug. A weaker currency reduces the cost of China's goods to foreign buyers, mitigating tariffs. The US responded the following day, labelling China a currency manipulator for the first time since 1994.
A slowing Chinese economy amid the trade conflict is likely to hit other export-dependent Asian countries such as South Korea and Singapore, with the yuan a significant part of the MAS's currency basket. The Korean won is already Asia's worst performer this year.
"We're in a new weakening phase for China's currency," said Chia. He advised clients it was not too late to hedge against depreciation, with the cost of selling yuan in the forward market well below the 2016 high. UOB predicts a decline to 7.30 as a "high probability event."
Little help from the Fed
China's influence over the yuan, and other Asian currencies, trumps the Fed's interest in the dollar. The Fed's July cut ended a four-year tightening cycle when rates rose in isolation, pushing up yields and the dollar. The opposite will not occur to the dollar as the Fed eases, with the notable exception of against the yen, Chia said. Japan's currency has a strong correlation with Treasury prices, and the 30-year bond just reached an all-time high.
The yen also enjoys long-held status as a safe haven. Recently, the Thai baht gained a similar reputation within ASEAN, becoming the best-performer in emerging markets in the past year.
As Japan has kept rates ultra-low for the past 20 years and was a pioneer in Quantitative Easing (asset purchases), it has little wriggle room. However, Asian central banks pre-empted the Fed with their own easing to resist currency appreciation and will continue to do so.
"Asian currencies will weaken alongside the yuan," Chia concluded.
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