This Week’s Top Headlines

i) RHB Research states that it is entirely possible for the ringgit to fall to RM5.00 against the US dollar in the next few months. This alarming prediction was raised when the greenback broke past its target price of RM4.60 on Thursday.

ii) The ringgit’s weakness was evident not just in relation to the dollar’s strength, but also when compared to other currencies. Our local note plunged to an all-time low against the Singapore dollar on Friday, at RM3.428.

*Due to the substantial length and complexity of the topics, I’ve decided to segregate this week’s newsletter into two parts. Part I focuses on the dollar versus the ringgit, while part II will talk about the Singapore dollar.

Part I has been sent to all patrons on May 28. This is part II of the newsletter.

Scroll down to read the details.

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The Singapore dollar only goes Up and Up…

The Sing dollar has continued to strengthen against the ringgit, surpassing its previous all-time high of RM3.401 in November.

It surged to RM3.428 on Friday, and is up 12.16% from its trough in March 2022.

In my previous issue, we talked about the dollar, which rallied to a 6-month high of RM4.638 due to the Federal Reserve’s aggressive rate hikes in comparison to Bank Negara Malaysia (BNM).

You may think that SGD’s strength is due to the nation’s central bank adopting a similar stance to the Fed, but Singapore is different.

Singapore does not have a monetary policy based on interest rates.

Contrary to popular belief, the nation’s central bank, known as the Monetary Authority Singapore (MAS), does not control the domestic borrowing/lending rates.

Instead, MAS directly intervenes in the currency market by buying or selling Sing dollars.

This intervention is determined by the exchange rate of the Sing dollar against a basket of other currencies.

Known as S$NEER, the basket contains the currencies of all the major trading partners of Singapore.

Think of S$NEER as an index of the Sing dollar’s strength.

MAS allows S$NEER to freely fluctuate within an undisclosed band.

If it falls below the band, MAS buys up Sing dollars to reduce its circulating supply, strengthening the local currency.

If it goes above the band, MAS sells Sing dollars to weaken the local currency.

To adjust the monetary policy, MAS can change:

• The slope of the policy band or its centre to strengthen/weaken SGD.

• The width of the policy band to handle volatility.

But why is Singapore able to do this?

Singapore is a small country. It has no natural resources and relies heavily on foreign trade.

• Exports and imports make up 300% of its GDP.

• For every dollar spent locally, 40 cents go to imports.

To lower inflation, MAS raises the slope of the policy band or the level at which the band is centred.

Doing so will strengthen the local currency, as MAS will buy up Sing dollars if S$NEER falls below the policy band.

A stronger currency makes imports cheaper.

Since Singapore relies heavily on foreign trade, inflation cools with a stronger Sing dollar.

Looking back at MAS' past decisions, Singapore has been diligently tightening credit conditions (ie. letting SGD appreciate by buying Sing dollars).

So yes, it’s not just people who have been contributing to Sing dollar’s strength, but MAS as well.

If you observe the SGDMYR chart, you’ll see that the Sing dollar has only really started to appreciate since MAS began tightening in October 2021.

This shifts more evidence to MAS' aggressive tightening campaign.

Wrapping Up…

Singapore utilizes the exchange rate to directly buy/sell Sing dollars instead of adjusting interest rates.

To lower inflation rates within the country, the central bank allows the local currency to strengthen.

That’s all for this week’s newsletter!

*This newsletter was written at 10.30 AM on 29th May 2023 and completed at 1.50 PM the same day. To get early access to our newsletter, be our patron for as little as $1/month!

Disclaimer: The information contained in this newsletter is for informational and educational purposes only. Nothing herein shall be construed to be financial legal or tax advice. The content of this newsletter is solely the opinion(s) of the publisher.