The decline in the currencies of Malaysia, Singapore and Taiwan won’t last because of accelerating inflation and current-account surpluses, Goldman Sachs Group Inc said in a research note yesterday.
All 10 of Asia’s most-active currencies outside of Japan fell against the US dollar last week on speculation that the US Federal Reserve’s rate cuts are coming to an end. The Malaysian ringgit and the New Taiwan dollar both lost 0.4 percent against the greenback last week, while the Singapore’s currency declined 0.01 percent.
“Higher inflation is a key reason for our long-held love affair with the Singapore and [New] Taiwan dollar and the ringgit,” wrote Michael Buchanan, chief economist of Asia ex-Japan with Goldman Sachs in Hong Kong. “Singapore and Malaysia use their exchange rates as the primary tool of monetary policy.”
Singapore’s dollar traded at S$1.3607 to the US currency at 3pm in the city yesterday, data compiled by Bloomberg showed. The ringgit was at 3.1575 to the US dollar and the NT dollar closed at NT$30.498, down NT$0.043 on turnover of US$1.022 billion.
Singapore’s inflation reached a 26-year high this year, spurring the central bank to tighten its monetary policy last month by allowing faster appreciation to reduce import costs.
Malaysia’s inflation rate also reached a 13-month high of 2.8 percent in March due to rising food and transport costs.
“There will be fundamental pressure for appreciation on these currencies from their strong current account surpluses,” Goldman said.
It expects Singapore to post a surplus of more than 20 percent of GDP this year. Malaysia’s surplus will reach “mid-teens” of GDP this year and Taiwan’s will be more than 5 percent, Goldman said.
All three currencies will also benefit from “China proxy trades,” it said.
These currencies have high correlation to the yuan and the forward market has already fully priced in the Chinese currency’s appreciation.
“The Singapore dollar and the ringgit have moved almost exactly the same amount as the yuan since the Chinese depegged the currency in July 2005,” and they have less “hassle premium” priced into their currencies due to the more open capital accounts, Goldman said.