Deutsche Bank: Short USD/SGD after Singapore’s expansionary budget announcement

A Singapore 10-dollar note Photo by Leslie Shaffer

Deutsche Bank tipped short USD/SGD after the Singapore government released an expansionary budget plan on Monday.

While an expansionary budget, including planned tax hikes, might seem to be something that would spur inflation and push the Singapore dollar lower, Deutsche Bank pointed to other factors in a note on Tuesday.

“Given that tax hikes are staggered and not immediate, the impact should not be inflationary at inception,” the bank said.

The much-anticipated hike in the goods and services tax (GST) was included in the budget, but the increase in the levy by two percentage points to 9 percent won’t come until sometime in the 2021 to 2025 period.

’Impressive’ growth data

Still, Deutsche Bank noted that the budget’s expansionary nature should help boost growth and inflation overall. But it added that with the economy already generating “impressive” growth data, including the fourth quarter’s forecast-beating 3.6 percent on-year gross domestic product (GDP) growth, “this should further support the case for MAS to tighten policy in April, we believe.”

Deutsche Band said it remained short on the USD/SGD, with an initial target of 1.28 for the spot pair.

It said the SGD NEER (nominal effective exchange rate) looked “cheap” as it was trading only 50 basis points above the middle of the band.

“This, coupled with our house view of a softer dollar, makes short USD/SGD compelling — a good beta to broad U.S. dollar weakness, with an added alpha from potential MAS tightening,” it said.

The USD/SGD was at 1.3210 at 13:49 SGT on Wednesday.

A Singapore 10-dollar note
Photo by Leslie Shaffer