Crunch time for Singapore Dollar and Renminbi

We estimate that the USD-value of central bank FX reserves – adjusted for currency-valuation effects – in China, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand rose by about $342bn (1.5% of GDP) between end-March 2020 and end-February 2021 (see Non-Japan Asia: NEERs and FX intervention, 26th March 2021).

The increase, which ranged from 0.3% of GDP in China to nearly 28% of GDP in Singapore, was partly the result of central banks buying foreign currency in the FX market. At the very least NJA central banks’ FX intervention capped the pace of appreciation (CNY, KRW, IDR, THB and TWD) or contributed to (modest) NEER depreciation (INR, MYR, PHP), in our view.

Of course the matrix of exchange rate policy AND balance of payment flows, and their underlying drivers, is key to past and future currency performance.

In the past 12 months the MAS has kept the Singapore Dollar NEER within a very narrow range of about 1.2%, effectively neutralising Singapore’s significant current account surplus, to support the critical external sector and ultimately reflate the economy.

However, the Singapore Dollar NEER’s recent rally and jump in Singapore CPI-inflation in February arguably complicate the currency’ near-term outlook.

Along with consensus, we forecast that the MAS will leave the parameters – (zero) slope, width and central rate – of the Singapore Dollar NEER band unchanged at its forthcoming semi-annual policy meeting. We think the NEER could dip temporarily before rebounding.

The People’s Bank of China has allowed large external trade surpluses and capital account inflows into China to push the Chinese Renminbi NEER to a 270-week high.

But the Renminbi is showing some signs of altitude sickness. The pace of monthly appreciation has halved recently and the PBoC has fixed USD/CNY higher in 6 of the past 7 sessions. Importantly CPI-inflation remains stuck at the bottom of its five-year ranges.

In this context, we think the risk is biased towards the PBoC more actively negating FX inflows into China and towards modest Renminbi NEER downside near-term.




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