Something Smelly This Way Come – SOR and SGD

Source : Wikipedia

The significance of yesterday may have escaped the general populace of Singapore and perhaps market professionals too. Indeed, it may even shock some of the scholarly economists.

It is rather simple.

USD/SGD hit its 1 year low at 1.2281 (this morning) and 6M SOR was fixed at its 2 year high at 0.6515%.

If you don’t care and don’t want to know, stop reading here.  Singapore’s foreign exchange policy is complex to a mind boggling degree.

Now… I did a correlation matrix between 6 month SOR and a whole bunch of potentially correlatable vectors and discovered that SOR is more correlated to Eurodollars than ever before.

2010-11 2011-2012
1Y IRS 0.139 -0.169
2Y IRS -0.079 0.28
ED1 -0.047 0.125
3M LIBOR 0.256 -0.022

Notice the following.

1. SOR has decorrelated with 3 month Libor in the past year.

2. SOR has correlated with the 1st Eurodollar contract.

3. SOR is highly correlated with 2Y irs.

4. SOR is negatively correlated to the 1Y irs.

I resist the urge to go off on a conspiracy theory tangent here.  The best conclusion we can draw is perhaps that this October, Santa is not expected to land in Singapore as far as expectations go.

The logic is a trifle simplistic. SOR is derived from SGD forward points. The forward points when stripped of Libor will give the SOR. The higher the Libor, the lower the SOR because forwards are interest rate differentials between 2 currencies.

That there was a correlation in the past with higher Libor and higher SOR was because in the credit crisis, the higher Libor was associated with risk off and USDSGD would rise as a result, taking forwards higher.

Counter intuitively, the lower Libor now, on expectations of monetary easing, would be risk on and USDSGD will fall, causing forwards to collapse.

Why is it not happening ?

USDSGD is lower along with Libor but forwards are not collapsing. This suggests other market mechanisms at work.

Perhaps it is market positioning and that banks have sold too much forwards in the past (evidenced in the basis swaps) and now, they are unwinding it because maybe, they do not see SGD strengthening much more in the slowing global landscape.

Given the absence of monetary policy, rates would rise when the currency is expected to weaken.

Who is selling the USDSGD ? Flows. Real money coming in to buy the billions of new corporate bond issues. Short term technical traders, etc.

What is standing in the way ?

MAS of course.

The situation is highly charged. MAS is struggling to rein in inflation, both CPI and asset prices, whilst trying to balance it with conducive growth.

Expectations are that MAS would lean towards monetary easing in October which would point to a weaker SGD and in turn, probably higher short term rates which is bad for growth.  And this is not considering the hot money outflow when offshore investors realise that SGD is not about to appreciate in the no brainer way it has in the past that has reaped them riches beyond the reach of local investors who do no benefit from currency appreciation.

A Conspiracy Theory

Now if I am not confused enough, I would be tempted to say we have not considered another agenda of MAS’s. An agenda that they would not want to jeopardise the local bond market.

I would be even tempted to say that MAS will rather the bond market flourish and protect the interests of the buyers of the SGD 26.44 billion worth of corporate papers on the street this year by keeping rates at their historic lows which means letting the SGD appreciate at the expense of export growth but benefitting from capital inflows.  This is almost like a hostage situation is it not ?

Who Suffers ?

Keeping rates low would be good for mortgagees. SGD appreciation is bad for property prices generally because hot money would encourage asset bubbles and  is bad for governing the brewing populism on the ground.

Exporters and the likes have been suffering in the past years and have, more or less, learnt to shut up.


I am really interested in the outcome of this October’s monetary policy statement and how neutral a central bank can be when it comes to interest rates.

PS :  Now, I am steeling myself for a potential barrage of comments from the likes of Dialastrategist and gang.

Qualifier : All views here expressed are my own and said in good jest. They are in no way intended to be subversive  or anti government, for whom I have deep respect for.