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MAS goes into Neutral

This week FX volatility faded further, credit spread tightened while US stocks headed towards 2900. Major central banks issued warning and IMF reduced outlook. Normalization is now a thing of the past for the G10. Despite clear warning of an economic downturn, markets are placing unconditional belief in policy maker’s ability to avoid crisis. For evidence that slowing global growth is causing concern between central banks, look no further than the Monetary Authority of Singapore (MAS) semi-annual monetary policy announcement. Given the small and open Singaporean economy, it was no surprise that challenging export environment and weak demand for electrics would weigh on outlook. Advance Q1 GDP report indicated the economy grew a modest 1.3% y/y in Q1 2019 from 1.9% in Q4. MAS is projecting a sustained deceleration in growth this year. After 24 months of acceleration and tightening twice (allowing the SGD NEER to appreciate), core inflation forecasts for 2019 was reduced to 1-2% range from 1.5% – 2.5% previously. MAS also reduced the headline inflation 2019 forecast to 0.5-1.5% from 1-2% previously.

In regards to SGD policy band, “ MAS will, therefore, maintain the current rate of appreciation of the SGD NEER policy band. There will be no change to its width and the level at which it is centered. This policy stance is consistent with a modest and gradual appreciation path of the SGD NEER policy band that will ensure medium-term price stability.”

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Overall, the MAS has shifted into neutral from a tightening bias. With rising downside risk to growth and inflation and pricing of SGD close to the strong end of the policy band it is hard to see how SGD will further appreciate.

In broader terms, after a wave of global optimism and minor policy normalization, bond markets have now recorded the highest level of sub-zero paper since 2017 totaling $10.6 trillion. Clearly, markets are not functioning correctly and error drift is increasing. While in the short term this suggests risky asset will be in demand, in the longer term a crisis is building.

ZAR strength remains despite major domestic issues

Considering the recent development in USD/ZAR, one has to admit that FX traders remain highly indulgent as to what concerns the South African rand. While both rating agencies S&P and Fitch have been downgrading South African government debt from investment grade to junk last year due to unfavorable budgeting and political turmoil, Moody’s has been the last-standing agency to grant investment grade. Yet a new assessment had investors worried that a downgrade to junk would have consequences on ZAR exchange rates and cause substantial capital outflows. However, none of it occurred since the rating agency postponement of the review maintains the rating Baa3, the lowest investment grade rating.

Despite the rating, it appears that the recent statement made by the agency doesn’t give much room for potential improvement: the South African Reserve Bank stands on its (hawkish) position that it should raise its repurchase rate by 25 basis points by the end of 2019 (currently: 6.75%) – although it’s been revising growth (from 1.70% to 1.30%) while inflation should remain stable (4.80%). Dragging issues relating to power supply shortage amid a massive indebted energy department and upcoming uncertain general elections on 8 May 2019 apparently do not bother investors, who have been favoring a positive risk sentiment and take long ZAR positions following dovish Fed and ECB monetary policies. Furthermore, recent drop of March business confidence for the fifth consecutive month as well as a decline in both month-to-month February mining (-1.50%) and manufacturing production (-1.60%) do not seem to have any impact on the currency.

There is definitely inadequacy considering current circumstances. The postponement of Moody’s rating decision from end of March to November boosted the rand, even though South African fragile economy and a forthcoming change in credit rating should have a negative impact on the ZAR. We therefore suggest investors to remain highly cautious.

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