What to expect for the upcoming MAS meeting? USD/SGD, Straits Times Index

What is coming up next week?

The MAS monetary policy statement will be published no later than 14 October 2022, which will see the release of the advance estimate for Singapore’s third-quarter GDP as well.

SGD has been resilient against its peers year-to-date. Can it continue?

A relatively higher headline inflation rate for Singapore versus its peers since the start of the year has pressured the Monetary Authority of Singapore (MAS) to adopt a series of four tightening moves since October last year. This comes amid Singapore’s higher vulnerability to imported inflation, with the country having to import most of its necessities, including food, energy, and raw materials. The latest headline inflation stands at 7.5% in September, towering above the rest of the region which are largely distributed across the 4-7% range. This translates to greater pressure for the MAS to keep up with its tightening in a bid to keep pricing pressures under control.

The hawkish direction for the central bank has driven an outperformance for the SGD against its regional peers year-to-date. The USD has thus far appreciated by ‘just’ 5.4% against the Singapore dollar since the start of the year, as opposed to other Asian economies’ currencies trending in the double-digit. As we head into the next MAS policy decision next week, further tightening is on the table. The debate revolves around whether it will be a single or 'double-barrelled' move. Coming after the upward shift in interest rate outlook from the US Fed and no signs of relief in Singapore’s inflation, a more ‘aggressive’ tool may be warranted, which will be an adjustment to the mid-point. Any additional adjustment to the slope could provide further tint of hawkishness. That may translate to Singapore dollar’s strength towards the rest of the year before the inflation ‘gap’ with its regional peers narrows into 2023.

USD/SGD: Upward trend remains, but could a near-term retracement be on the card?

Despite a series of tightening moves by the MAS, the central bank seems to be largely playing catch-up with the Fed’s policies. Strength in the SGD against the US dollar on previous MAS’ tightening moves have been short-lived thus far, keeping the USD/SGD in a firm upward trend. The weekly chart revealed an upward break of an ascending channel pattern in September, but a recent bearish pin bar formation and oversold RSI reading seem to point towards a near-term retracement. With the overall upward trend still in place, this could bring any retracement to the 1.407 level on watch for the formation of a new higher low. This level marks the confluence of the upper channel trendline, along with a key 61.8% Fibonacci retracement level.

Advance estimate for Singapore’s third-quarter GDP to be released as well

The narrowing of Singapore’s GDP growth forecast for 2022 in August may provide a slightly less optimistic footing for the upcoming quarter GDP estimate. After a second-quarter GDP miss (4.4% YoY versus earlier 4.8% estimate), the Ministry of Trade and Industry (MTI) has downgraded its growth projections for 2022 to ‘3.0 to 4.0 per cent’, from previous ‘3.0 to 5.0 per cent’. A push into contractionary territory (49.9) for Singapore’s September Purchasing Managers; Index (PMI) provides testament to the slowdown in global manufacturing sentiments, as tighter policies and persistent pricing pressures continue to translate into weaker sentiments. The electronics sector PMI also marked a deeper push into contractionary territory (49.4). Economic conditions may be set to moderate further as global central banks’ tightening continues. Current projections suggest that inflationary pressures may see some easing to 3.2% in 2023 and 2.6% in 2024, but growth forecast could still point to a tepid outlook, with 2.9% annual GDP growth in 2023 and 2.3% in 2024.

Post-Fed outflows revealed in Straits Times Index

The latest SGX fund flow data revealed heavy net outflows of S$458 million from institutional investors last week, likely brought on by the Federal Open Market Committee (FOMC) meeting where post-Fed sentiments took a beating on the hawkish build-up in interest rate outlook. Previous off-cycle tightening moves in January and July this year were generally met with a downside reaction in the STI, potentially with the surprise moves spurring jitters over the persistence of the inflation issue. That said, market reaction to planned MAS meetings has been somewhat mixed, potentially with tightening expectations being baked in while sentiments take its cue from the global risk environment.

A breakdown of the 3,185 support level has brought the Straits Times Index (STI) back to the previous consolidation zone near its June-July bottom. Year-to-date, the index is down just slightly by 1.6%, as compared to the MSCI Asia Pacific Index’s 26% decline and the MSCI World Index’s decline of 25%. The reasons for its resilience are that the scope of the post-Covid-19 bounce for the index was not as extensive as that of other global indices, along with its exposure to the value (financial) sector. Oversold technical conditions could drive a retest of the 3,186 – 3,200 level of resistance but with further moderation in economic conditions ahead, any bounce could still be seen as a relief rally for now rather than a clear bottom.