Singapore Dollar (SGD) performs poorly as a safe haven under a stress test. The stress test shows a strong recovery posted by US Dollar against other Asian currencies, according to a latest report published by Bank of America Merrill Lynch.

Singapore Dollar

Singapore Dollar (SGD) Forecasts

According to Global Emerging Markets (GEM) Fixed Income Strategy report on Asia Strategy Watch released recently by Bank of America Merrill Lynch (BofAML), the USD/Singapore Dollar (SGD) forecasts are facing upside risks in light of the headwinds from a strong USD trend.

Christy Tan and team feel the close correlation between the Swiss Franc (CHF) and Singapore Dollar (SGD) also suggests more room for weakness for SGD.

The report notes the global easing environment compounding the slower growth on the domestic front would make preference for SNEER to trade in the lower half of the band.

BofAML has revised its forecast for 4Q13 for USD/Singapore Dollar (SGD) from 1.220 to 1.260. Similarly it revised its 2Q13 forecast from 1.230 to 1.275 and the third quarter forecast for USD/SGD from 1.230 to 1.265.

The report notes most Asian currencies have declined, with the exception of CNY, against the greenback this month, with surprising positive data from the U.S. With the U.S. experiencing recovery on the housing front, coupled with lower unemployment rate and enhanced retail sales, BofAML feels the USD move may be persistent, that will cause Asia FX to trade at lower levels.

BofAML analysts feel the Singapore Dollar’s strong alignment to global factors, its substantial correlation with the CHF and little capacity for Singapore’s external sector to benefit from the US’ growth recovery are some of the factors dragging the Singapore Dollar (SGD).

Christy Tan and team feel despite posting positive surprise on the GDP front during the first quarter of 2013, Singapore’s recent data are still lackluster when compared to those in the U.S. Besides the recent improvement in U.S. data may not directly benefit Singapore’s external sector, as it doesn’t signify a broad-based recovery in domestic consumption.

BofAML report also observes a correlation coefficient of 0.9 between the Swiss Franc and the Singapore Dollar (SGD), signifying a high correlation. BofAML team observes that the recent depreciation of Swiss Franc is a clear indication of unwinding of safe haven positioning. Now SGD is subjected to greater scrutiny as the next currency to undergo similar stress tests.

The report observes that CHF has deprecated about 520 bps since beginning of May. However SGD, considered the CHF of Asia, has fallen 300 bps during the same period. BofAML analysts feel this suggests further fall for Singapore Dollar (SGD).

SGD Vs CHF

BofAML analysts prefer to position for a higher USD/Singapore Dollar (SGD) trading range and lower SGNEER going forward.