With Phase 3 of Singapore’s Covid-19 lockdown easing measures due for year-end as community spread holds steady at single digits, Fitch Solutions sees the Singapore Dollar (SGD) strengthening against the US Dollar amid a worsening pandemic situation and an uncertain presidential election. It has revised its 2021 FX forecast to $1.3700/US$ from $1.3800/US$.
“Over the short term (next three to six months), we see more room for the SGD’s rally to run given a bullish technical outlook and the contrasting situations in the US and Singapore,” remarks the research house in a report issued on 23 October. The SGD broke resistance at $1.38/US$ on July 27 and traded stronger ever since, averaging at around S$1.3662/US$. Fitch Solutions has revised its 2020 average exchange rate outlook from S$1.3850/US$, from S$.3950/US$.
And this rally is far from over, with SGDUSD breaking through the 200-day moving average and the 50-day average, which hints at a continued bullish trend. According to Fitch, this trend is supported by continued uncertainty in the US over a contested Presidential election in November and rising Covid-19 cases numbering in the tens of thousands, with political gridlock hindering an effective response to the outbreak.
“Meanwhile, Singapore’s economy has begun recovering from the record contraction of 13.2% y-o-y in Q220, with real GDP growth bouncing back to -7.0% y-o-y in Q320. The island state also has plans to further lift restrictions adopted to contain the spread of Covid-19 likely in Q420 in what it calls ‘Phase Three’ of re-opening the economy,” continues the report, noting that many Asian economies have enjoyed similar success in controlling the Covid-19 outbreak.
See also: Equity markets recover, but growth subdued by coronavirus
In the long-run over the next 12 to 24 months, Fitch continues to expect a slight appreciation in the SGD as the economy picks up over the upcoming quarters. They see the Covid-19 spread remaining relatively contained; this alongside the government’s gradual efforts to re-open both the economy will hopefully improve domestic demand within the Singapore economy. The economic recovery in Asia, led by a rapid V-shaped recovery in China will also drive Singapore exports and by extension, the SGD as well.
Potential upsides await FX investors in late 2021 and 2022 with the potential rollout of a global vaccine to revive international travel. This is likely to be a further boost to the Singapore economy, since Changi Airport is an international and regional aviation hub. More travel to Singapore will likely prove a boost to the strength of the Singapore Dollar.
Monetary policy is likely to remain steady in the long-run, with Fitch Solutions predicting that it will remain largely within its identified trading range over 2021. The Monetary Authority of Singapore noted in its latest monetary policy statement that the relative stability of S$NEER reflects the Singapore Dollar strengthening against the USD, offset by its weakening against some regional currencies. It did not appear to express a strong view either way on the current strength of the SGD, suggesting that no large-scale monetary policy changes are forthcoming.
But investors should beware the possibility that more liberal re-openings like those in France, Germany and Malaysia could see a resurgence in community infections. “The risks to our forecasts are weighted to the downside, chief of which is the re-imposition of lockdown measures in Singapore before the rollout of a vaccine,” warn Fitch Solutions.
As of 1.41 pm, the SGD is currently trading at $1.36 against the USD.
