The Roar of a Tiger

A long time ago in a country far, far away I lived and worked amongst a people who were genuinely friendly, took pride in their education, and were skilled, productive and loyal workers. The people saved much of their money (certainly more than I did) and entrusted their government to manage those savings, as well as to manage the country responsibly and effectively, which it did so very well. As one would imagine, this is a very prosperous country. That country is Singapore.

The Island City-state of Singapore

Singapore is actually one of the few existing city-states in the world. Just 60 miles from the equator in Southeast Asia, it is a wonderful vacation destination (a bit like San Diego, but very muggy) for those on that side of the planet anyway. Singapore is also a leading international business hub with its highly developed, free-market economy. It's open to new business both domestically and from abroad and is corruption-free. Aside from tourism, the economy is very dependent on its exports, which are focused on information technology, consumer electronics, biotech and pharma, and financial services.

An Independent-minded Central Bank

On April 14, the Monetary Authority of Singapore (MAS), Singapore's central bank, surprised global financial markets when they announced an unprecedented two-pronged approach to tightening its monetary policy. They: 1) reset the exchange rate policy band in which the Singapore dollar (SGD) trades, effectively revaluing their currency vs. a basket of currencies, and 2) will allow the SGD to gradually appreciate against the basket.

The aggressive double-barreled tightening move by the MAS was designed to head off inflation and rein in their booming economy. Advance Q1 GDP estimates were 13.1 percent year-on-year and an amazing 32.1 percent on a seasonally-adjusted quarter-on-quarter basis (granted, it did come off a low base).

The value of the Singapore dollar is managed by the MAS against an undisclosed trade-weighted basket of currencies. The basket is said to consist of currencies of countries that are Singapore's major trading partners and competitors. It's managed differently than a pegged currency (like the Chinese renminbi) as the MAS lets the Singapore dollar float around by a few percent of a targeted mid-point within a band. Many banks create models based on the size of Singapore's trading partners to try to replicate the MAS basket to forecast moves in the Singapore dollar.

Is China Next?

The unexpected move by the MAS triggered a rally in the currencies of most developing Asian countries as traders positioned themselves for tightening monetary policies by the other Asian central banks. In the chart below you can see the one-day percent moves (end-of-day April 13 to end-of-day April 14) in the Asian currencies versus the U.S. dollar.


Source: Bloomberg

Notice that after the Singapore announcement, the Chinese renminbi did not move, nor did the Indian rupee or Hong Kong dollar for that matter. However, the Chinese economy grew by an annual rate of 12 percent in Q1, the fastest rate in three years, so global and regional pressure will certainly intensify for Chinese authorities to allow the renminbi to appreciate and to hike interest rates. In what some economists see as a signal that such moves may already be in the works, China's State Council last week warned the markets of "strengthening inflationary expectations" and it promised to curb rapid increases in housing costs, as new figures showed that property prices were continuing to accelerate.

Singapore has clearly set a new pace for export-led economies in Asia, if not around the globe, to tolerate currency appreciation at the expense of a potential loss of export competitiveness, particularly against China whose currency remains pegged to the U.S. dollar. One can see in the table below that Asian currencies, save the CNY and HKD, have already been allowing their currencies to appreciate to various degrees over the last 12 months.


Source: Bloomberg

The Four Asian Tigers

Singapore is a member of the famed four Asian Tigers — Hong Kong, South Korea, Taiwan and Singapore — who maintained very high economic growth rates and rapid industrialization from the 1960s through the 1990s. These countries have since graduated into the "advanced economies" category, yet remain amongst the fastest growing economies in the world.

Expect the Asian Tigers to show continued export growth in 2010. The U.S. ISM Manufacturing Index has been shown to be an excellent leading indicator of export growth in the Asian region, and the index is expected to remain stable and in expansionary mode (above 50) for the remainder of the year. More importantly, China's Manufacturing PMI stands at 55.1 and has been increasing every month for 16 straight months. Given the increasing importance of intra-regional trade, this is perhaps a better leading indicator of export growth in the region. The Tigers' currencies (aside from the Hong Kong dollar, which is pegged to the U.S. dollar) should benefit by the expanding trade surpluses. In addition, their central banks may begin raising interest rates this year, whereas the Fed is likely to keep rates low for the remainder of the year, thereby attracting global short-term investment flows into those currencies.

Singapore Dollar Strength: Steady and Persistent


Source: Bloomberg

Lastly, here's a weekly chart of the USD:SGD over the last ten years. The big picture is easy to see. Aside from the rally in the U.S. dollar mid-2008 to early-2009, the SGD has been appreciating relentlessly. As they say, the trend is your friend, so our recommendation is not to bet against a strengthening Singapore dollar versus the U.S. dollar, or versus the euro.but that's another story for another time.

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.