Wednesday, April 14, 2010 - 03:46
Analysis: Singapore SGD Appreciation Move May Presage China's
BEIJING (MNI) - The announcement by the Singapore central bank that it had shifted to a policy of gradual currency appreciation could be, at least in part, a preemptive move aimed at avoiding any speculative frenzy which would follow the depegging of the yuan against the dollar, analysts said.
They were speaking after the Monetary Authority of Singapore (MAS) said that it plans to shift its Singapore dollar policy band to allow for a "modest and gradual appreciation" to head off rising domestic inflation pressure.
But analysts said that the MAS announcement could also represent a pre-emptive strike to mitigate the impact on regional currency markets that would undoubtedly follow in the wake of a move on the Chinese exchange rate.
"My thinking is that (the MAS) knows that something is coming sooner rather than later," said Tim Condon, an economist with ING in Singapore. "They won't have a really agitated day when the revaluation occurs as the market will bypass them and look around the region for where currencies haven't adjusted."
The MAS decision was released in the wake of a report from the Asian Development Bank on Tuesday which called on the region's central banks to intervene less in the currency markets. It warned on the "serious repercussions of macroeconomic management in the region."
China is thought to be a leading culprit for the perceived undervaluation of Asian exchange rates as regional economies compete for export market share. Yuan appreciation will provide room for other Asian currencies to rise, analysts believe.
The ADB report cited a study from the Peterson Institute released in January which calculated that the yuan is 40.7% undervalued, but also that the Malaysian ringgit is 30.5% undervalued, that the Taiwan dollar's undervaluation is estimated at 28.5%, with Singapore's at 24.7%.
"We have a general issue in Asia where keeping currencies cheap via intervention pegs their economies to the Federal Reserve and with Asian growth much stronger than the U.S., Fed monetary policy is inappropriate so interest rates must rise and currencies must appreciate," said Callum Henderson, head of forex strategy at Standard Chartered Bank in Singapore.
There is something of a precedent for Singapore's move. On the evening of July 21, 2005, shortly after China announced it was ending the yuan's peg to the U.S. dollar and moving to a managed float, Malaysia's central bank said that it would do the same with the ringgit.
While China has so far resisted calls to let the yuan appreciate -- which arguably kept held other Asian currencies from appreciating -- speculation is rising of a near-term move.
In recent weeks, Washington has toned down its rhetoric on Beijing's exchange rate policies, culminating in Treasury Secretary Timothy Geithner's decision to delay the release of a report which could have named China a currency manipulator and so opened the door to punitive action against China's currency practices.
In turn, the Chinese government has adopted a more cooperative diplomatic tack with Washington in recent weeks.
There is speculation that Beijing has given Washington some kind of assurance that it is preparing to move to end the yuan's 18 month-old dollar peg in the near term and allow the currency to rise. The New York Times reported last Thursday that a consensus is forming in the Chinese State Council about the need for the yuan to rise as an anti-inflation measure, sending a jolt through the currency markets.
Although the report's impact has since died off, China is widely expected to unveil the next phase in its currency reforms in the coming months.
Ben Simpfendorfer, an economist with the Royal Bank of Scotland in Hong Kong, said that the Singapore authority's inflation assessment justified the move on its own, but also acknowledged that possible policy moves in Beijing may have played a role.
"If I was Singapore, and with the odds of China moving over the next six months, that's what I'd do," he said.
The risk is that the expected move by China either doesn't come or falls far short of market expectations. Non-deliverable forward markets are pricing in appreciation of around 3% over the next 12 months, though some forecasts are for a much more aggressive rise.
"After Geithner delayed the report, the ringgit accelerated as the market speculated on a (yuan) move -- the risk is that when that move happens, the extent of it will disappoint," said Standard Chartered's Henderson.
Analysis: Singapore SGD Appreciation Move May Presage China's
BEIJING (MNI) - The announcement by the Singapore central bank that it had shifted to a policy of gradual currency appreciation could be, at least in part, a preemptive move aimed at avoiding any speculative frenzy which would follow the depegging of the yuan against the dollar, analysts said.
They were speaking after the Monetary Authority of Singapore (MAS) said that it plans to shift its Singapore dollar policy band to allow for a "modest and gradual appreciation" to head off rising domestic inflation pressure.
But analysts said that the MAS announcement could also represent a pre-emptive strike to mitigate the impact on regional currency markets that would undoubtedly follow in the wake of a move on the Chinese exchange rate.
"My thinking is that (the MAS) knows that something is coming sooner rather than later," said Tim Condon, an economist with ING in Singapore. "They won't have a really agitated day when the revaluation occurs as the market will bypass them and look around the region for where currencies haven't adjusted."
The MAS decision was released in the wake of a report from the Asian Development Bank on Tuesday which called on the region's central banks to intervene less in the currency markets. It warned on the "serious repercussions of macroeconomic management in the region."
China is thought to be a leading culprit for the perceived undervaluation of Asian exchange rates as regional economies compete for export market share. Yuan appreciation will provide room for other Asian currencies to rise, analysts believe.
The ADB report cited a study from the Peterson Institute released in January which calculated that the yuan is 40.7% undervalued, but also that the Malaysian ringgit is 30.5% undervalued, that the Taiwan dollar's undervaluation is estimated at 28.5%, with Singapore's at 24.7%.
"We have a general issue in Asia where keeping currencies cheap via intervention pegs their economies to the Federal Reserve and with Asian growth much stronger than the U.S., Fed monetary policy is inappropriate so interest rates must rise and currencies must appreciate," said Callum Henderson, head of forex strategy at Standard Chartered Bank in Singapore.
There is something of a precedent for Singapore's move. On the evening of July 21, 2005, shortly after China announced it was ending the yuan's peg to the U.S. dollar and moving to a managed float, Malaysia's central bank said that it would do the same with the ringgit.
While China has so far resisted calls to let the yuan appreciate -- which arguably kept held other Asian currencies from appreciating -- speculation is rising of a near-term move.
In recent weeks, Washington has toned down its rhetoric on Beijing's exchange rate policies, culminating in Treasury Secretary Timothy Geithner's decision to delay the release of a report which could have named China a currency manipulator and so opened the door to punitive action against China's currency practices.
In turn, the Chinese government has adopted a more cooperative diplomatic tack with Washington in recent weeks.
There is speculation that Beijing has given Washington some kind of assurance that it is preparing to move to end the yuan's 18 month-old dollar peg in the near term and allow the currency to rise. The New York Times reported last Thursday that a consensus is forming in the Chinese State Council about the need for the yuan to rise as an anti-inflation measure, sending a jolt through the currency markets.
Although the report's impact has since died off, China is widely expected to unveil the next phase in its currency reforms in the coming months.
Ben Simpfendorfer, an economist with the Royal Bank of Scotland in Hong Kong, said that the Singapore authority's inflation assessment justified the move on its own, but also acknowledged that possible policy moves in Beijing may have played a role.
"If I was Singapore, and with the odds of China moving over the next six months, that's what I'd do," he said.
The risk is that the expected move by China either doesn't come or falls far short of market expectations. Non-deliverable forward markets are pricing in appreciation of around 3% over the next 12 months, though some forecasts are for a much more aggressive rise.
"After Geithner delayed the report, the ringgit accelerated as the market speculated on a (yuan) move -- the risk is that when that move happens, the extent of it will disappoint," said Standard Chartered's Henderson.
