On Thursday (20 Feb), the Singapore dollar (SGD) dropped to 1.40 against the USD amidst the increasing fears about recession as well as the new reported cases of Covid-19 which appears to stabilise in China but springing more in other parts of the world.
Peter China, the FX strategies for United Overseas Bank opined that SGD’s weakening on Thursday was concurrent with the general weakness in Asian currencies caused by fears of the Covid-19 outbreak.
Generally speaking, the Asia Dollar Index has reached its lowest levels in more than two months as shown by the value dropping to 103.50.
Mr Chia noted that “the USD/SGD move from 1.35 to 1.40 in the past month has been one of the steepest climbs in recent years.”
Compared to the end of 2019 at 1.35 level, the affected SGD has dropped 3.9 per cent. Among other currencies too, SGD is one of the worst performers ranked at 16th out of 20. The only currencies with worse performance compared to Singapore were Australian dollar, Thai baht and New Zealand dollar.
Philip Wee, the FX strategist for DBS Bank remarked that the Covid-19 outbreak has impacted in ways US-China trade war has not. Mr Wee prediction in May 2019 was for the SGD to depreciate to 1.40 by Q3 of 2019.
In February, the SGD nominal effective exchange rate (NEER) has weakened to the lower half of its policy band. This is due to the Covid-19 epidemic and the Singapore government has warned of an impending recession this year, Mr Wee added.
On Monday (17 Feb), the official growth forecast for 2020 was downgraded from 0.5-2.5 per cent to the range between -0.5 per cent and 1.5 per cent.
Mr Wee also stressed that “Covid-19 has not only delayed the recovery from the Phase One trade deal signed in mid-January but also broadened the economic weakness into domestic demand, for example tourism and retail sales,” and that the government expect the impact to be more severe than Sars in 2003.
During the Sars epidemic, real GDP growth had been 6.1 per cent in Q4 2002 after which it had dropped to -0.3 per cent year-on-year (y-o-y) in Q2 2003. After this, due to China’s post-World Trade Organisation ascension, real GDP growth bounced back up.
Mr Wee commented that “unfortunately, China’s economy is still slowing amid an ongoing trade war today. Unless Covid-19 stabilises quickly in Q1 and does not extend into Q2, the door remains open for a shift to a neutral or zero appreciation stance at the next SGD policy review in April.”
Added to this, since the beginning of 2020, the Japanese yen has weakened 2.8 per cent against the USD, thus making chipping away the currency’s appeal as safe-haven. Japan has also reported the most coronavirus cases outside of China. After a sales tax increase in October 2019, which led to a recession in Q4 2019 on quarter, Japan is expected to experience negative growth in future quarters due to Covid-19 outbreak.
Since the end of last year, the euro currency has fallen 3.8 per cent, which suggests a possible contraction in Europe due to increasing recessionary risks, Mr Wee remarked.
In the past several weeks, SGD has shown rapid movements amidst the technical resistance at 1.41, but Mr Wee cautions against a strong rebound.
Some market watchers recalled the V-shaped recovery like the case of Sars in 2003. At the time, China experienced 10 per cent growth, Mr Wee noted as “China’s long-term potential growth is moving to below 5 per cent”. Last year, China’s growth was around six per cent.
Most of the weakness seen in SGD is due to the expectations of monetary policy easing by the Monetary Authority of Singapore (MAS) in April as well as the expected slowdown in growth in Q1 of 2020, UOB’s Mr Chia opined, assuming that Covid-19 outbreak does not worsen even more.
Mr Chia further noted that “moving forward, assuming that new Covid-19 cases peak in late-April to early-May, a growth rebound in the second quarter of 2020 may spur a recovery of the SGD towards 1.37 by the end of the second quarter”.
OCBC Bank currency economist Terence Wu opined that the costs to the economy from the Covid-19 outbreak have to be quantified even after the situation improves.
“Thus, there may still be considerable uncertainty on the macro front for Singapore and the rest of Asia. On the flip side, economic prints in the US has been more resilient than expected since the start of the year, and the improvement in growth momentum is not showing signs of slowing down…From a relative macro perspective, the USD should be favoured against the SGD and the Asian currencies on a multi-week horizon.” Mr Wu concluded.