I received an email from Chuin Ting, CEO of MoneyOwl a few days ago.
It was an internal education sharing by their head of Corporate Business, David Yap on how we should look at MAS upcoming monetary policy posture. Before coming to MoneyOwl, David used to work in the trading of market instruments and foreign exchange in large international banks.
I always know that unlike many countries, we manage monetary policy through our currency rather than the interest rate. However, I did not pay attention to how it is actually done.
Until I saw David’s explanation. He eventually re-penned his thoughts here: Technical Note: Understanding The Upcoming MAS Monetary Policy Statement On The Singapore Dollar
If readers are not too aware of the S$NEER, I hope this short education piece would be useful to you.
Next time, when you come across a Business Times or Straits Times article on MAS’s policy changes, you can relate to it better.
So what is the S$NEER?
The S$NEER is the framework that MAS use to manage the strength of the Singapore Currency.
The main purpose is to balance between keeping the currency strong, but not too strong that it affects the competitive edge of the country in global trade.
It is also to rein in inflation.
While the majority of the economies around the world manage monetary policy through interest rates, Singapore manages this through our currency versus the value of the currencies of some of our biggest trading partners.
Singapore has always been a small and open economy where 40% of what we spend domestically goes to imports. So the rationale is that we have imported inflation and hence the effectiveness of using the value of SGD to implement monetary policy.
- Strengthen SGD when inflation is high
- Weaken when the economy is weak
How MAS Manages the S$NEER in 3 Ways
At each monetary policy review in April and October, the MAS also decides whether it will make adjustments to the band’s slope, width or center.
Here’s David’s explanation:
“Imagine this band to be made up of two upward sloping parallel lines. The policy band is always upward sloping with the x-axis representing time and the y-axis representing the value of SGD (not USDSGD but just SGD).
MAS ensures USDSGD stays within this permissible trading band by intervening each time USDSGD trades close its bounds.”
1. The Slope of the Band
“MAS will steepen this slope to fight inflation and reduce the slope when our economy weakens.
This means that MAS will allow a certain percentage of SGD appreciation every year to fight imported inflation (positive slope). “
2. The Center of the Band
“This is used when there is a more significant change to the outlook for growth and inflation.
This is a de facto SGD devaluation used when confronted with difficult economic challenges. “
Kyith: MAS decide to center the band downwards in April 2009 during the GFC to make our currency more competitive in global trade. They center the curve back in April 2010 when the situation looked better.
3. The Width of the Band
“The band widens to accommodate increased volatility in the FX market.
It is basically ‘to save MAS bullets’ on intervention when markets turn extremely choppy due to events. “
Here is What David Expects MAS to Do
Given the economic challenges we have now, here is David’s analysis of how MAS may do, with respect to the 3 ways that was explained previously:
The slope of the band
“I believe it has to be reduced significantly to flat (no slope) as the economic picture is fast unraveling, faster than the Global Financial Crisis.
And if the mega fiscal packages announced by DPM Heng is anything to go by, expect an aggressive move by MAS. The market has certainly priced in this possibility. So USDSGD may not move much if this is announced.”
The center of the band
“For reasons cited above, MAS may not wait 6 months to devalue the SGD.
There could be a re-centering of the policy band lower. This is not fully priced in by the market. So if MAS implements that, USDSGD will trade higher on the news. (Spot reference: USDSGD 1.4268 on 28 March 2020 1430 hrs)”
The width of the band
“USDSGD has been trending up but still in an orderly manner. There is, therefore, no need to widen the band”
Here is What MAS Actually Did on 30th March 2020
This morning MAS announced what they actually did.
The slope of the band: MAS set the slope to neutral. They have not done this since Oct 2017
The center of the band: MAS took more drastic action by lowering the mid-point of the policy band for the first time since the global financial crisis in April 2009. The width of the band was left untouched.
The MAS also reaffirmed that official forecasters expect the Covid-19 pandemic to thrust Singapore into a recession of between -4% and -1% in 2020.
Core inflation, headline or all-items inflation forecast is slashed to between -1% and 0. Disinflation pressure should broaden. The inflation outlook was between 0.5% and 1.5%.
The NEER is something new to me and I am glad David explain this succinctly to us. Now that I know this, it makes me a little bit more interested to see whether his reading matches what MAS would do.
In this economic climate, we will not be the one setting out a devaluation posture. Everything is relative. It depends on who would dare to take up a posture to make their currency weaker so that they can be more competitive when global trade ever pick up again.
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