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This Dollar’s Not Fallin’

The world’s major central banks, along with the Federal Reserve have all announced some form of open-ended QE in a coordinated attempt to keep the world financial markets from imploding.  Aside from the fire hose the Fed is bringing we have all of these events as well:

  1. The ECB’s new OMT program, essentially unlimited bond buying which will create unlimited moral hazard, regardless of the protestations of Mario Draghi or Germany.
  2. The $156 billion in announced infrastructure spending by China; who will recycle their current account surplus into more concrete and steel for a few months
  3. The German high court upholding the constitutionality of the European Stability Mechanism that paves the way for the E.C.B. to do whatever it wants to maintain the Euro.
  4. The Bank of England reviewing ad infinitum their $85 billion per month QE program.
  5. The Bank of Japan announcing they are extending their existing bond-buying programs by another ¥10 trillion ($128 billion USD).

This response is really no different than the October 4th 2011 intervention where the 5 major central banks created essentially unlimited swap lines between them to put a floor under the markets and bank stock CDS spreads were blowing out to the upside.

The Singapore Dollar should continue on its multi-year appreciation versus both the U.S. Dollar and the Euro from a long-term perspective.  In the near term, it tested and blew out the April low of S$1.2357 and traded at S$1.2291 after the decision of the German high court and the Fed’s QEIII announcement.  The Monetary Authority of Singapore (MAS) sets interest rates based on what the Fed does and then adjusts the trade-weighted exchange rate to control inflation.  Having zero-bound interest rates with rapidly rising housing costs, the biggest portion of the CPI’s gain, has the MAS’s hands tied with respect to the U.S. Dollar. 

They cannot loosen up the money supply in response to QEIII without igniting a property market already verging on a bubble to protect their U.S. trade.  Not surprisingly S-REIT’s have been the best performing asset class in the world in 2012, returning more than 37% year to date.  So, it stands to reason that they will not alter policy much from where it is between now and year end, except to break their interest rate peg and raise rates, which would ignite a sharp drop of the USDSGD pair. 

The MAS is struggling currently with now negative GDP growth, technically putting Singapore in a recession.  The latest figures out of Singapore have a quarterly contraction of 0.7% and lowered expectations for the year of ~2.0%.  The CPI in July dropped back to 4.0% annualized which is still above the MAS’s comfort zone so we should expect them to continue to manage the exchange rate down in the face of monetary expansion by the Fed.   The conclusion has to be the probability of the MAS raising rates in this environment is rather low.

QEIII will send the USDX lower, since it is heavily weighted versus the EUR and the JPY.  The Euro will trade higher by year end and the Yen has been toying with a weekly close below the technically significant ¥78.1 level for two weeks now, with obvious intervention taking place at opportune times to support it.  The PowerShares U.S. Dollar Index Bullish ETF (AMEX:$UUP) is in for a rough ride down in the face of all of this QE. While not at all volatile, a move back to the $21 area is an easy mid-term short, using any short-covering rallies to add to your position.

The unwinding of the fear trade in Europe that will occur now that ratification of the ESM by the German Supreme Court has happened will result in a rush of capital back into the Euro.It began on 7/24 in anticipation of these moves.This is extremely bullish for the Euro as it now confirms that there will be a structure to the Euro for the foreseeable future.While the powers that be there will negotiate for better terms, Spain and Italy will agree to be bailed out and the OMT will kick in at that point.Part of the conditionality for their bailout will be pledging their sovereign gold as collateral.This could easily send EURUSD past $1.30 to $1.34.

The EURSGD pair covered back to S$1.60 during the unwinding of the EURUSD short position until last week but that is rolling over because of the fundamentals.A similar thing happened in the USDJPY pair which forestalled a breakdown of support there.The CurrencyShares Euro ETF (AMEX:$FXE) will see $132 per share before the year’s end with a longer-term move back to $150 per share in 2013.

Singapore’s banks are heavily exposed to European debt but because of the strengthening of the currency versus the Euro all summer the supposition is that a majority of that debt is of the higher-quality Northern European variety versus speculative bets on the unstable periphery of the PIIGS nations.  The long term outlooks both for the Euro and the U.S. Dollar versus the Singapore Dollar are bearish due to the massive amount of QE that will have to be put forth to keep the banks stabilized so the MAS will continue to manage the appreciation of the Singapore Dollar versus its major trading partners, which are increasingly local, while trying not to import said inflation from the West.

Singapore’s biggest single trading partner, Malaysia (AMEX:$EWM), has seen mild depreciation of the Ringgit versus the Singapore Dollar in the past two years, less than 5%.The next two strongest exporters, Hong Kong and China run nominal pegs versus the U.S. Dollar.But, Singapore has been dealing with a steady appreciation of their Dollar for most of the century while maintaining a very strong balance of trade, so the MAS does not seem to be participating directly in the mercantilist currency wars, but rather have skillfully managed the situation allowing capital to flow into Singapore as raw materials bought with steadily appreciating currency units and exporting finished goods at higher margins, not sweating the currency arbitrage which is negligible.Now that the situation in Europe is less volatile, Singapore’s banks will be in a better position to weather any shocks to the local real estate market.

The bottom line is that the fundamentals for Singapore’s economy are in better shape than many of its top trading partners and many of them have a need to debase their currencies to maintain their current level of economic growth, in the case of China, or size in the case of the U.S. and Europe.This is a knock on effect of the fear trade.Now that that has been removed for the future, capital will flow again and expect Singapore’s strongest partners to begin blossoming as ASEAN moves closer to economic inter-connectedness.

This will be reflected in the Straits Times Index and the iShares MCSI Singapore Index ETF (AMEX:$EWS) which we are very bullish on for all of the above reasons.For a listed closed-end fund we like The Singapore Fund (AMEX:$SGF) which is still trading at a 9.2% discount to NAV per the most recent release by the fund on September 5th which placed the fund’s NAV at $15.14 per share, while SGF closed at $13.97 on September 24th.

Exported inflation from earlier rounds of QE have placed the MAS in the position of having to defend against asset bubbles being blown via low interest rates so they won’t be attempting a competitive devaluation to protect their strong export markets, rather they will continue to allow the Singapore Dollar to appreciate to protect their manufacturers input costs


While we like shorting the USDSGD pair now at S$1.2248 for a run down to S$1.20 on current fundamentals and lower over time as ASEAN’s (AMEX:$VWO) top economies continue to heat up.The USDSGD pair will hit all-time lows once the E.C.B.’s OMT is actually unleashed, i.e. when Spain or Italy request a bailout, that could become significant because of the lack of wiggle room for the MAS at this point until property prices ease.Even though there has been affirmation of the European Union and the Euro as a more formal political/monetary arrangement the short-term bounce will be limited in the EURSGD as the long-term fundamentals are still very bearish.

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Peter Pham is an author, international fund manager, and a registered financial director by the Cayman Monetary Authority (CIMA). In 2013 he published his first book entitled, The Big Trade: Simple Strategies for Maximum Market Returns. He currently manages the portfolio of a global hedge fund and runs an asset management company, Phoenix Capital.  (read more)

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