Trading Against a Black Box – USDSGD

We are living in an age of transparency. Twitter, Facebook, Linked In and the likes expose our lives to the daily scrutiny of the world.

Central banks, too, are coming out to manage expectations to avoid creating unnecessary ripples. Bernanke’s and Draghi’s showmanship have been utterly impressive, in their ability to shock and awe even before they get their fingers dirty. Its a whole new meaning of the word “Buy on Rumour, Sell on Fact”.

Even regional central banks are also picking up the act. Reserve Bank of India, Bank Negara, BI, etc.

Singapore remains the only black box, providing healthy employment to a tribe of economists and strategists whose main preoccupation is to second guess the central bank’s actions twice a year.

The semi annual Monetary Policy Statements are riddles in themselves. Modest and gradual appreciation ? Widening of Band (no specifics) ? Change of Slope (no specifics) ?

The only clue we have to local monetary/forex exchange policy is this paper written in 2007.

“In the Singapore context, the ultimate target of monetary policy can thus be defined as price stability or low inflation. The monetary policy instrument to achieve this purpose is the exchange rate when MAS intervenes in the FX market to bring the S$ trade-weighted index (S$ TWI), i.e. the operational or intermediate target, within the prescribed policy band.”

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Reasons given for adopting a foreign exchange policy are found in this 2001 paper.

“1. MAS found exchange rate to be the most effective instrument to keep inflation low. Other possible intermediate targets, in particular interest rates, are less effective in influencing real economic activity and domestic inflation outcomes……

2. A freely floating SGD may become too volatile in the short run. Worse, the currency could become misaligned over a sustained period of time, leading to resource misallocation.”

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SGD is born to APPRECIATE ONLY. Deflation is never a problem in Singapore.

How To Benefit ?

I did a comparison table of various currencies including Gold and Silver versus the USD. 3 columns – Year to date 2012, 5Y since 2007 and 10Y since 2002.

In the past 5 years, a Singaporean would have done well to buy Silver and Gold and JPY vs the SGD.
In the past 10 years, Silver, Gold, BRL, AUD, NZD and CAD would have done well.

It is harder for a Singaporean as compared to a Malaysian because all the Malaysian needed to do was to buy a lot of SGD, for example. Then again, the poor Japanese would have it worse.

What do we expect from here ?

Harder times ahead, if you want to move your money offshore. Because the opportunity cost would be great. If the trend continues for SGD strength after next month’s Monetary Policy Statement, investment decisions will get increasingly difficult.

Unless, of course, you are an American investing your USD here.