The SARS playbook; HK's credit rating downgrade


Flush liquidity to help address the underperformance of SGD rates to US; Economic spill-over from COVID-19 into FX
Eugene Leow, Wei Liang22 Jan 2020
    Photo credit: AFP Photo


    Rates: Flush liquidity supporting SGD interest rates 

    Short-term SGD rates have started to ignore the push higher in USDSGD with the 3M SOR settling around 1.55% after a brief spike in early February. We have argued over the past couple of weeks that further underperformance in short-term SGD interest rates versus their USD counterparts is not warranted. With the SGD NEER already in the bottom half of the trading band (reflecting COVID-19 risks), it would take a material re-assessment of the outlook to trigger another leg higher in SGD rates. Moreover, judging from the MAS bill auctions and the SORA (which remains well-behaved), liquidity is flush in the system.
     
    With the government announcing a supportive budget for FY2020 (budget deficit of 2.1% of GDP), we think that liquidity conditions will remain flush. The timing and extent of SGD rates outperformance will depend on several factors. While there would likely be a resumption of a global manufacturing rebound in 2Q, we are somewhat more wary on the services sector. The tourism and retail-related segments could see a more extended period of slowdown (impacting Singapore’s economy) and suggest that SGD interest rates are unlikely to get an immediate tailwind from a lower USDSGD (or a higher SGD NEER) just yet. Speculation of Fed cuts are still acute given considerable uncertainties over how COVID-19 developments will play out. It would probably take several more weeks before the economic impact could be quantified before we can get greater conviction on the Fed call.

    FX: Feeling the economic toll from COVID-19

    Sentiment remains weak for exchange rates other than the USD. Focus has turned to the economic spillover of COVID-19, especially for Asia and Europe. Momentum for the Singapore dollar remains the weakest. Singapore warned that the economic impact from COVID-19 was already worse than SARS (November 2002 to June 2003). Back then, real GDP growth in Singapore fell to -0.3% YoY in 2Q03 from 6.1% YoY in 4Q02. Earlier this week, this year’s official growth forecast was lowered to between -0.5% and 1.5% from 0.5-2.5% previously. A technical recession is possible if the epidemic is not contained in 1Q20 and extended into 2Q20. Budget 2020 presented yesterday was considered a stabilisation and support package aimed at reassuring businesses and people. The central bank is ready, if needed, to recalibrate its SGD policy at its next policy review in April. Hence, USDSGD is at risk of hitting 1.40 for the first time since 2015.
     
    The euro is weakest Developed Market currency. Germany’s ZEW expectations plunged to 8.7 in February from 26.7 in January. More importantly, the present situation sub-component has not only remained in negative territory but deepened again to -15.7 from -9.5. Apart from a wobbly economy teetering on recession again, Germany is also facing a political leadership crisis. Chancellor Angela is facing pressure to step down after her designated successor, Annegret Kramp-Karrenbauer, resigned as leader of the Christian Democratic Union party. Externally, US President Donald Trump is targeting the Eurozone as the next front for his trade war. Lastly, UK and EU are on a collision course on future relations after the Brexit transition ends on December 31. As EURUSD drifts lower in its 1.05-1.10 range, GBPUSD is likely to follow into a weaker 1.25-1.30 band. 

    Eugene Leow

    Rates Strategist - G3 & Asia
    eugeneleow@dbs.com

     

    Philip Wee

    FX Strategist - G3 & Asia
    philipwee@dbs.com

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