World Economy

Singapore Can’t Escape Asia Currency Wars

Singapore Can’t Escape Asia Currency WarsSingapore Can’t Escape Asia Currency Wars

Singapore, an economy known for its disciplined monetary and fiscal policy, has managed to get caught in the crossfire of a currency war with no easy way out.

Ever since Abenomics, Asian currency wars have been a dominant theme for macro investors. A currency war begins when one country decides to devalue their currency in order to stimulate export demand. But neighboring countries with stronger currencies have a harder time competing for exports so they begin to devalue as well. What ends up happening is a “race to the bottom” where both countries end up devaluing their currencies into oblivion in order to stay competitive in the global marketplace, Seeking Alpha reported.

China is the last player to fire off a fresh round of devaluation. They want to remove the yuan’s de facto peg with the US dollar in an effort to stymie decreasing growth and debt problems. Singapore will need to follow in the footsteps of China if they wish to reenergize their economy and prevent a real slowdown. This will create upward pressure on USD/SGD, as the Singapore dollar depreciates against the US dollar.

Due to China’s recent actions, the Monetary Authority of Singapore had to take an easier stance on their own currency. Like many Asian countries, growth in Singapore has been stagnating at 2% per year and the MAS has had to lower their expectations for 2016.

Inflation has been falling for some time and since 2015 has been negative (deflation). The most recent print was -0.8%.

And finally exports have begun to decelerate.

Prime Minister Lee Hsien Loong summed up the situation pretty well in his recent New Year’s Eve speech:

“Yes, we have many more opportunities in the globalized world, but we also face fiercer competition. Our economy is slowing down and undergoing transition. We cannot expect an easy journey ahead.”

Singapore’s MAS operates differently than a standard issue central bank. For starters, it does not control interest rates at all, it instead, lets the market set rates.

The MAS chooses to center their monetary policy solely around management of the exchange rate. The Singapore dollar is managed around a basket of currencies which are weighted based on their influence to Singapore’s export and import markets. MAS can manipulate their currency by changing the slope, location, or width of the band.