Singapore dollar bulls eyeing MAS hawkish path

The Singapore dollar’s three-month winning streak is facing its stiffest test yet as global growth headwinds dim the outlook for further central bank tightening. An above-consensus inflation report today would go a long way toward ensuring the currency’s advance remains on track.

A gauge of the country’s nominal effective exchange rate, which the Monetary Authority of Singapore (MAS) guides to conduct policy, is showing signs of weakness amid continued global trade tensions and a slowdown in China. On the flip side, strong domestic demand and resilient inflation are keeping alive wagers that the MAS will accelerate the pace of appreciation for a third straight time in April.

The clashing signals raise the stakes for economic data due in the run up to the decision.

Unlike most central banks that use interest rates to tackle inflation and growth, the MAS instead steers the local dollar against a basket of its counterparts, adjusting the pace of appreciation, known as the slope, the width of the target band and the level at which that band is centered.

The MAS tightened policy in both of its decisions last year, spurred by rising inflation underpinned by an improving labor market and a robust economic expansion.

The country’s leading index suggests growth is set to remain steady, even amid increased downside risks to the global economy. Similar gauges tracking the OECD nations and China show waning momentum.

Resilient domestic demand will continue to put pressure on core inflation, which is hovering at the highest since 2014. Should growth accelerate, there could be a greater pass-through of import and labor costs to consumers, the MAS and Trade Ministry said in their last inflation report in January.

The central bank’s April policy decision is still “live,” Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch, wrote in a Feb. 19 note to clients. The central bank could surprise the market with a hawkish bias given core inflation at or above the historical average, he wrote.

Still, increasing uncertainty over the global growth outlook has taken some of the wind out of the Singapore dollar’s sails. The International Monetary Fund cut its forecast for the world economy for the second time in three months in January, while warning rising trade tensions could spell further trouble. MDT/Bloomberg