Trading The Singapore Dollar: What You Should Know
Singapore is one of the friendliest expat destinations in the world if you take out of the equation the cost of living. Singapore belongs to the group of the strongest economies in Asia, welcoming investments and technological innovations from all around the world. As Singapore is a powerful economic hub, the Singapore dollar draws strength from it.
In this blog, we will share some insights regarding the Singapore dollar and the economy of Singapore that might prove useful to traders.
Singapore Economy: How Strong Is It?
Singapore is a city-state built on an island in southwest Asia, off the tip of the Malay peninsula. Singapore became a British Crown colony in 1946, joined the Federation of Malaysia in 1963 but eventually became independent on August 9th 1965. The Republic of Singapore, as it is its official name, is a highly developer economy and one of the most important ports in East Asia. Singapore belongs to the so-called group of the Four Asian Tigers that includes Taiwan, South Korea and Hong Kong which are among the most developed economies in this part of the world.
Singapore is considered a global business-friendly economic hub by economists. Singapore attracts a large amount of foreign investment because of its strategic location, skilled workers, low tax rates and advanced infrastructure. Singapore has been ranked fourth among the world’s most competitive economies in 2023, according to the latest International Institute for Management Development (IMD) World Competitiveness Ranking, losing one position when compared to 2022 statistics.
The Monetary Authority of Singapore and the Singapore Dollar
The Monetary Authority of Singapore (MAS), formed in 1971, is Singapore’s central bank and integrated financial regulator. MAS also works with the financial industry to develop Singapore as a dynamic international financial centre. The passing of the MAS Act gave MAS the authority to regulate the financial services sector in Singapore.
It has also been entrusted to promote monetary stability, and credit and exchange policies conducive to the growth of the economy. According to the MAS website, the authority now administers the various statutes pertaining to money, banking, insurance, securities and the financial sector. Following its merger with the Board of Commissioners of Currency in 2002, MAS also assumed the function of currency issuance.
The Singapore dollar (SGD – S$) is the official currency of the Republic of Singapore since 1967. According to the Triennial Central Bank Survey released by the Bank for International Settlements (BIS), the Singapore dollar is the tenth most traded currency in the world.
Singapore Dollar Performance
The USD/SGD currency pair hit a multi-year high on September 1st 2022 when it traded at $1.43 as you can see on the monthly chart below.
Date Range: May 1st 2018 – 27th July 2023. Date Captured: July 27th 2023. Past Performance is not an indicator of future results.
However, in the fourth quarter of 2022, the Singapore dollar gained ground with the pair reaching a multi-year low as we entered the new year, trading at $1.31.
Date Range: May 2nd 2023 – 27th July 2023. Date Captured: July 27th 2023. Past Performance is not an indicator of future results.
During 2023, there have been fluctuations with the Singapore dollar showing its strength against its US counterpart and the pair trading between $1.32 - $1.35.
What Do Analysts Think About the Singapore Dollar And The Singaporean Economy
One thing that you might not know is that the MAS does not dictate rates as happens in other economies such as the US or the UK. Since 1981, Singapore's central bank manages the exchange rate, rather than interest rates. You may wonder why the MAS has chosen to do this instead of following the Fed or ECB policies.
MAS, Interest Rates And The Singapore Dollar Exchange Rate
The reason is that Singapore is a small economy that depends on trade. This means that inflation is heavily influenced by the strength, or weakness, of the Singapore dollar compared to the Japanese yen, for example, or other currencies such as the US dollar etc. The MSA has vowed to control the strength of the Singapore dollar to manage consumer prices; this is done with the Singapore Dollar Nominal Effective Exchange Rate (S$NEER). The Singapore Dollar Nominal Effective Exchange Rate is the exchange rate between the Singapore dollar and a basket of currencies of the country's major trading partners.
Is Singapore’s Economy Still One Of The Four Asian Tigers?
Singapore’s economy avoided a technical recession in the second quarter of 2023, growing 0.7% year-on-year and 0.3% on a quarterly basis, according to a report published by the country’s statistics office. Economists polled by Reuters anticipated a growth rate of 0.3% quarter-on-quarter and 0.6% year-on-year.
MAS analysts wrote in an annual review that “the near-term outlook remains uncertain with downside risks. Should latent vulnerabilities in the global financial system emerge in the coming months, consumer and investor confidence could take a further hit, with adverse implications for the broader economy.” MAS estimated the gross domestic product for 2023 to ease to a range of 0.5% to 2.5% this year, much lower than the growth of 3.6% in 2022.
Economists at HSBC suggested that “Singapore is well positioned to lead the region with a swift recovery.” Commenting on Singapore’s economy on CNBC they said that there are pockets of economic resilience, noting “while the return of Chinese tourists is only back to 30% of the equivalent level (2019 levels), Singapore is, nonetheless, the champion in restoring direct flights with China. This paves the way for an acceleration in Chinese tourists in the coming months, supporting Singapore’s services sectors.”
A report on the country’s inflation by the UOB said that “while headline inflation is coming off slightly faster than expected, the moderation in the pace of core inflation remained in line with projection. As such, we now expect headline inflation to average lower at 4.7% (from previous forecast of 5.0%) while we continue to expect core inflation to average 4.0% in 2023. Excluding the 2023 GST impact, we now expect headline inflation to average 3.7% (from previous forecast of 4.0%) and core inflation to average 3.0% (unchanged) in 2023, both still above the “standard” 2% objective.”
ANZ analysts shared their projections regarding the Singapore dollar in a note published on June 26th, suggesting that “with the MAS on hold, the Singdollar will not benefit from any upward re-centring of the policy band like last year. But with its appreciation path still in place, we expect the S$NEER to continue drifting higher and stay in the upper half of the policy band. Singapore continues to attract capital inflows, which the MAS has partly been absorbing via increases in their FX reserves. The strong correlation between SGD and the DXY means that the key driver will be from the Dollar side. With the US Federal Reserve close to ending their tightening cycle, we see the DXY falling over the second half of the year, which will help push the SGD stronger.” The ANZ report forecasts the Singapore dollar to trade against the US dollar at $1.31 by year-end.
Risk Management When Trading the Singapore Dollar
If you have decided to include the Singapore dollar in your trading portfolio, you have to assess the risks. Beginner traders sometimes tend to overestimate their capabilities, making mistakes due to potential ignorance and the urgency to start trading. However, mistakes when trading can have negative consequences, sometimes big and sometimes small.
There are ways for beginner traders to minimise their risks. One of them is to boost your trading knowledge by studying the various trading techniques, learning as much as you can regarding trading. Webinars, blogs, seminars, videos and a wide array of educational materials are provided by brokers for free on the Internet.
Another way is to learn how to use risk management tools such as the stop-loss order. These tools exist in trading platforms, waiting for you to utilise them when executing your trading strategies. Risks management tools help you reduce potential losses if markets move against your plans and keep you on a safe track without losing valuable funds. Learn how to take advantage of them to be able to build the financial strategy that would help you enjoy the trading experience.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
