The Monetary Authority of Singapore (MAS), Singapore’s central bank, recently tightened monetary policy as the economy grew 6.5% in the 3rd quarter. According to MAS, this will ensure “price stability over the medium term while recognising the risks to the economic recovery”
Following this news, the Singapore dollar immediately rose around 0.2% and is currently sitting close to 1.348-1.349 per U.S. dollar.
Why Does Singapore Dollar Appreciate When MAS Tighten Monetary Policy?
MAS uses the Singapore dollar nominal effective exchange rate (S$NEER) as its main monetary policy tool. This is different from countries in the United States which use interest rates to manage inflation. As Singapore is a small and open economy with high dependence on trade, much of our inflationary pressure comes from external sources which would not be significantly affected by domestic interest rate adjustments.
Instead, MAS changes monetary policy by adjusting the slope, width and midpoint of the currency band that the Singapore dollar allowed to fluctuate within, based on assessed risks to the country’s growth and inflation. During the October 2021 Monetary Policy Statement, MAS raised the slope of its currency band from the previous 0% rate of appreciation per annum. By doing so, it means that the Singapore dollar is allowed to appreciate against a basket of currencies within an undisclosed band, thus strengthening against other currencies.
What Does This Mean For Local Consumers?
This tightening of monetary policy will help offset some of the rising costs for local consumers. For local consumers, having a stronger Singapore dollar means that inflation may actually be on a manageable basis, as imported goods and services would be comparatively cheaper. This has a positive impact on sectors that are dependent on material costs, supply chain, energy prices, foreign manpower, etc. Local travellers would also benefit from the more favourable exchange rates when they travel to other countries.
How Can Local Investors Take Advantage Of This Monetary Policy By The MAS?
#1: Hedge Currency Risks By Increasing The Absolute Value In Deposits
For local investors who are vested in various foreign markets such as United States, Australia, United Kingdom, etc., the strengthening Singapore Dollar presents an opportunity for investors to take advantage of, by increasing deposits into their respective foreign brokerages. For example, by depositing more Singapore dollars into our brokerage account and buying United States Dollars, when the Singapore dollar is appreciating, would yield more United States Dollars which could be used to purchase USD denominated shares.
#2: Locking In Additional Profits
Investors could also take advantage of the strengthening Singapore Dollar by withdrawing their cash in the trading accounts. Beyond that, they could also liquidate some of their existing shareholdings and realise these gains or profits, and withdraw them out. The favourable exchange rate allows them to have more Singapore dollars post-transaction.
#3: Understanding The Impact That A Strengthening Singapore Dollar Has On Companies With Strong Business Interests or Transactions In Foreign Countries
Singapore companies that have strong international exposure to foreign transactions might see their revenues or profits being impacted by the monetary policy.
A case study that we could look at would be Singtel where it is currently headquartered in Singapore, and is Asia’s leading communications technology group, providing an extensive range of digital and telecommunication services to consumers and businesses.
For the 1Q Business Update published on 12th August 2021, we can see that all the key metrics such as Operating Revenue, EBITDA, Net Profit are reported in Singapore Dollars.
Source: Singtel
An appreciation in Singapore dollar would mean that companies with foreign exposure and profits, like Singtel, will see a decline in their overseas profits in Singapore dollar terms.
Periodic Movements In Currency Exchanges Presents Both Opportunities And Risks
As an investor, beyond understanding the various portfolio companies, we can also look at the company’s overall exposure through its global subsidiaries, associate partners and the actions that could be taken advantage of by the company’s management team for capital allocation, deployment or divestment.
Understanding macroeconomics can also allow investors to take advantage of forex opportunities to optimise their gains. While an appreciating Singapore dollar can benefit Singapore investors in the abovementioned ways, foreign exchange is dynamic and the investors will also have to be aware of the implications of a declining Singapore dollar. Regardless, MAS’ monetary policy statement does provide guidance on the broad direction of the Singapore dollar and investors should pay heed to MAS’ bi-annual monetary policy statements.
