Flash Notes-Singapore: Recalibrating The UOB SGD NEER Model

In the most recent MAS monetary statement (14 Oct 2014), the MAS reported that the SGD NEER had fluctuated withinthe upper half of the policy band over the past six months. However, the UOB SGD NEER model was showing thatthe SGD NEER had fluctuated within the lower half of the policy band. As such, our assumption that the SGD NEER isappreciating at a 2.5% pa rate is on the bullish end.

    We also took the opportunity to re-adjust the UOB SGD NEER bilateral currency weights by incorporating Singapore’slatest trade data while using econometric methods to reduce the tracking error with the MAS-released SGD NEER. Ourview on the current trading bandwidth remains the same at 2%, both ways.

    Our updated model now assumes the SGD NEER’s appreciation path at 2.0% pa, where the SGD NEER is currently tradingaround 0.29% below the midpoint, rather than the 2.0% below midpoint in the older model. We think that the 2.0%appreciation in the SGD NEER is justified by the lesser-than-expected core inflationary pressures domestically, as wellas the broad-base appreciation of the USD against Asian currencies (including the SGD). With that, we see the USD/SGD moving towards a high of 1.35/USD by 3Q 2015, before coming lower to 1.33/USD by 4Q 2015.