SGD thoughts before the MAS policy decision - Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Apr 13, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Research Team at Nomura, suggests that the Monetary Authority of Singapore (MAS) is due to release its monetary policy statement on 14 April1, and they expect (we assign a 70% probability) it to leave its policy stance unchanged.

    Key Quotes

    “Prior to the February MAS policy review, we assigned a 60% probability to an unchanged policy stance. In our risk scenario (30% probability), the MAS announces some form of easing, while we currently see almost no potential for tightening.

    We derive our view from our Singapore economists’ forecasts for 2016 GDP growth (1.8%) and core inflation (0.7%), which remain within MAS forecast ranges of 1-3% for GDP growth and 0.5-1.5% for core inflation. Indeed, our conversations with market participants as well as published surveys on analyst expectations for MAS policy show that the risk of easing has fallen due to improving economic conditions in China and broader global markets.

    With reduced market expectations of policy easing, we believe short SGD positions (especially versus USD) have been pared back. As such, we see potential for an asymmetric reaction to the upcoming policy announcement, where an unchanged policy would elicit little to no rally in SGD but policy easing would likely prompt a significant (immediate) depreciation of SGD.

    We estimate a re-centering of the S$NEER lower by around 1.5% could lead to a 1.6% rise in USD/SGD2 to 1.3650, while the new weak end of the band (assuming a 1.5% re-centering lower) would be at 1.3920. A reduction of the slope would have a less significant depreciation impact on SGD. That said, a policy easing scenario is unlikely, in our view, but given this asymmetric reaction function, we prefer to trade S$NEER from the short side. We acknowledge that improving market conditions reduce the likelihood of S$NEER trading down into the weak end of the policy band, but considering our medium-term concerns over China and Nomura’s view that US Fed will still hike in June, we also believe S$NEER is unlikely to trade at the extreme strong side of the policy band.”
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