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By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
MAS: Options, Odds & Outcomes
Markets remain unconvinced one way or another as the late recovery (to limit losses) from dips in Wall St was juxtaposed against firmer UST yields (with 10Y around 1.68%).
USD was a touch softer (1.19 EUR and mid-109 USD/JPY). But not convincingly either as AUD lacked traction to mid-0.76; while INR and IDR were pressured. Pre-MAS SGD was above 1.34.
Ahead of tomorrow’s MAS meeting (coincident with Q1 GDP flash release at 8.00am SGT), it may be useful to examine the options and the possible outcomes. For the record though our expectations, as is the broad-based consensus, is for the MAS to;
i) maintain the 0% S$NEER slope (no appreciation bias);
ii) keep the mid-point unchanged from March 2020 levels;
iii) hold the (presumed +/-2% policy bands steady.
This status quo on policy accommodation, despite ostensibly better than expected pick-up in growth amid vaccine rollout, is consistent not only with a bumpy and uneven recovery amid lingering uncertainty following an unprecedented setback to the levels of growth.
That said, here are the MAS’ options along the S$NEER’s policy parameters:
(1) S$NEER mid-point [shift the policy mid-point higher]
(2) S$NEER slope [restore a calibrated (“slight”) appreciation bias]
(3) S$NEER band width [Narrow/Widen]
Clinically speaking, all three option are available to the MAS. But some are more equal than other, to steal from Orwell. So let’s examine them in turn.
(1) is highly unlikely (probability of <2%) as a mid-point shift higher, equivalent to step appreciation, an aggressive tightening tool typically only resorted to during an overheating.
As for (2), this is admittedly a matter of time. But not rushing into it is equally important to ensure a more solid and broad-based recovery.
At this meeting the odds of a a slight S$NEER slope appreciation bias being restored remains rather slim (10-15%).
Finally, there appears to be no real case for any adjustment to the bandwidth (3). This has been a recourse during periods of heightened volatility; but always a temporary resort.
But the circumstances of the rich S$NEER, which by our estimation is some 130-140bps above the policy mid-point, makes for some interesting policy outcomes or lack thereof. First, even if the MAS surprised by turning more hawkish (or revoking dovish bias to a much larger degree) it is highly unlikely to have a discernible or durable impact on USD/SGD.
Barring a mid-point shift higher (extremely low probability of <2%) that is. Whereas even a calibrated restoration of S$NEER slope will not immediately increase S$NEER headroom and so the existing 60-70bps S$NEER upside constraint is binding!
This is not unlike the outcome from an even more nuanced dial back in dovish bias by dropping reference to “prolonged accommodation”. In which case, USD/SGD will struggle to dip below low- 1.33 without independent and broad-based USD weakness.
The most interesting aspect of a rich S$NEER (at 130-140bps above the mid-point) is that any manipulation of the band-width of the policy bands, as unlikely as it is, could act as a temporary tightening (wider bands) or easing (narrower band); as a rich S$NEER is either allowed more headroom to exploit from wider bands or squeezed lower by a lower ceiling from narrower bands respectively.
But all the options (for change) have very low odds. And the MAS is likely to stay on hold; which means USD/SGD may dip, but stop short of a shift given limited S$NEER headroom.
Source: Mizuho Bank Ltd
