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MAS policy shift today is an ultra-significant signal

It is imperative to take note because market conditions are going to worsen in the next few months. Before we start, this is what happened best put across by Straits Times today.

MAS monetary policy shift: What’s the significance?

MAS has flattened the slope of the band it uses to guide the local currency against an undisclosed trading basket, reducing the rate of appreciation to zero per cent.

Zero appreciation means that the MAS now has a “neutral” stance on exchange rate policy.

The last time the MAS put the Singdollar policy band on a path of zero appreciation was in October 2008, when the last financial crisis triggered a global recession.

For those of you who likes it raw, here is the full monetary policy statement. These are my takeaways from this piece of news.


MAS doesn’t think US Federal Reserve will hike rates anymore

Monetary Authority of Singapore MAS manages the SingDollar to achieve stability since foreign trade is so important to this economy. If the SingDollar appreciates too much, Singapore loses export competitiveness. If the SingDollar depreciates too much, the country imports inflation. If this isn’t clear, look at the following chart which shows that strong level of correlation between the Dollar Index basket and USDSGD. Exchange rate stability means keeping closely to the Dollar basket.


USDSGD – DXY overlay

The economic idea here is very simple. MAS had to adopt a bullish stance on the Singapore Dollar in 2014- 2015 based on expectation of rate hikes by the US Federal Reserve so that it can walk in step with the USD strengthening in order to maintain a stable exchange. Now that the forex market is betting on diminished if not outright ‘no hikes’, naturally speculators will be betting SingDollar appreciation if MAS kept it’s appreciative stance.

The perversity of today’s move lies here: by moving to a neutral stance as a signal to speculators not to bet on SingDollar strengthening, MAS is acknowledging that they agree that US Federal Reserve is unlikely to hike rates anymore.


USDSGD is going to top or has topped already

This is the other sentence in the Straits Times article that sang to me.

The last time the MAS put the Singdollar policy band on a path of zero appreciation was in October 2008, when the last financial crisis triggered a global recession.


Considering that MAS has all its eyes on the global situation, in my opinion this is how the decision announced today was arrived at – the global situation now must resemble October 2008!


USDSGD situation back late-2008 and now

After a flash in the pan, USDSGD tops early 2009, nosedives from QE1 easing in November 2008. This was preceded by MAS neutral stance 4 months earlier or just 1 month before QE1. The similarity this time is striking. In a convoluted process, USD rallies from 2014 with promises of rate hikes, gets one in the last FOMC of 2015 and now the bias is already shifting to easing as the chance of another hike diminishes. Note my 30 March piece which already observed increasing rate hike ‘disappointment‘. US Fed may or may not run the next QE program but I bet that after 2-years of mumbling and only 1 rate hike done, the immensity of changing to ‘No Hike’ has same currency impact as a new QE program!


What this means to currency traders?

  1. The US Federal Reserve may or may not raise rates. Purely based on economic reasons, it has absolutely zero reason to hike. It might hike because of political/face-saving reasons.
  2. In a no hike situation, DXY might not plunge below 92 which is the peak disappointment level. Yellen might continue to make promises of hiking in order to manage a ‘soft landing’ for the USD or to put it unkindly – to boil a frog.
  3. When market finally realises/achieves full consensus the Fed is never going to hike, USDSGD will turn down strongly in favour of SGD strengthening because of rejection to the toxic USD.
  4. Prospects for SingDollar looks very good even for MAS’s neutral stance.

USDSGD 3 month chart, 1983 – present


Bonus chart: Is XAUUSD the canary in the coal mine?

No tea leave left unread.


The tea leaves

Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.

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One thought on “MAS policy shift today is an ultra-significant signal”

  1. Wern Farrago says:

    Wow thanks!!

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