USD/SGD shaky as markets grapple with US rate cut

The USD/SGD dropped below S$1.38300 on Wednesday 04 February 9PM Singapore time (SGT), as the US Dollar (USD) continues to weaken post-US Fed rate cuts.

US central bank cuts interest rate by 50bps

On Tuesday 03 February, the US Federal Reserve – the country’s central bank – rolled out an emergency interest rate cut of 50 basis points, bringing down the Fed Funds Target rate (FFTR) to a range of between 1.00% and 1.25%.

The rate reduction has come hot on the heels of last week’s record-setting stock market correction – the S&P 500 index fell 12% in just six days, the fastest in history – thanks to a worsening coronavirus situation.

Jerome Powell, the Federal Reserve Chair, said in a press conference following the announcement that ‘the coronavirus poses evolving risks to economic activity’, even though the ‘fundamentals of the US economy remain strong’.

‘The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy,’ he added.

He did not provide any indication when asked if further cuts will take place in the upcoming Federal Open Market Committee (FOMC) taking place on 17 and 18 March.

This is the first rate cut occurring in between scheduled FOMC meetings since the 2009 global financial crisis.

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Rate cut ‘dealt a blow’ to USD’s safe-haven status

IG Asia market strategist Pan Jingyi said that the surprise cut by the Fed had 'with little doubt dealt a blow to the US dollar and against hopes of some support regarding its safe-haven status’.

The greenback had weakened against most major currencies in the hours after the rate reduction. The US Dollar index (DXY) ended lower by as much as 0.5%, before settling 0.18% lower at 97.186 (from previous close of 97.36).

Pan expects the USD to remain subdued in the near-term ‘in light of the limited room’ that the likes of the European Central Bank have to manoeuvre.

She further noted that based on Chicago Fed President Charles Evans’ latest remarks post-rate cuts, there is a possibility of rates going down to zero again.

Like the USD/SGD, the USD/JPY also continues to face downward pressure, as global risk sentiments remain soft amid the contagion’s seemingly unstoppable spread. On 03 March, the USD/JPY fell to a six-month low of ¥107.15.

USD still in ‘oversold territory’

The USD has since regained some ground in the wee hours of Thursday morning SGT, as markets anticipated further interest rate cuts by other major central banks. The USD/SGD rose over 20 pips, or 0.23% to S$1.38625 as of 11.55am on 05 March.

UOB forex analysts said that the USD is ‘still in oversold territory’, and is not showing signs of stabilisation just yet.

‘From here, there is room for the USD to probe the 1.3820 level but 1.3800 is unlikely to come into the picture. On the upside, a move back above 1.3880 (minor resistance is at 1.3860) would indicate the current weakness has stabilised,’ they wrote.

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