The Singapore dollar has been trading on the strong side, but it isn’t likely to rise much further, UOB said in a note last week.
It noted that the Singapore dollar NEER (nominal effective exchange rate) has been largely at a premium to its estimated mid-point, while the weak U.S. dollar has buoyed the Singapore dollar as well.
“However, we believe that it may be difficult for the Singapore dollar to strengthen further against the U.S. dollar going forward,” UOB said. “With increasing trade tensions between the United States and China, trade and exports from Asia are at risk of getting negatively impacted. Given that Asian economies have large export components, there is an increasing risk that Asian currencies like the Chinese yuan, the South Korean won and including the Singapore dollar may weaken somewhat should trade tensions rise further.”
The trade tensions also come as the U.S. Federal Reserve is normalizing policy, with gradual interest rate hikes and balance sheet reduction expected, UOB said.
“In other words, there may be limited downside for USD/SGD below 1.30,” it said.
UOB forecast the dollar/sing at 1.29 in the second quarter of this year, rising to 1.30 in the third quarter, 1.32 in the fourth quarter and 1.33 in the first quarter of 2019.
In late Friday afternoon Asia trade, the U.S. dollar was fetching 1.3152 Singapore dollars.
The bank also said it expected two more 25 basis point interest rate hikes from the Fed this year, after the March hike.
“With Singapore’s domestic interest rates following quite closely to the U.S. rates, we forecast the three-month SIBOR to edge higher towards 1.70 percent by the second quarter of 2018 and onward to 1.85 percent by the end of 2018, it said.
