By David Finnerty

The Singapore dollar’s two-year streak as the top-performing Asian currency is seen ending this year as the nation’s central bank may start loosening its policy as soon as April.

The Monetary Authority of Singapore, which uses the exchange rate as its main policy tool rather than interest rates, has let the local dollar appreciate against major trading partners’ currencies to counter price pressures. That may change now as inflation shows signs of slowing.

“The period of Singapore dollar’s outperformance may be ending as we expect the MAS to commence monetary policy normalization” in April, said Peter Chia, FX strategist at United Overseas Bank. “While it may still strengthen against the US dollar, the gains are likely to lag regional peers going forward.”

The local currency has already weakened about 2% against the dollar this year, slipping to the middle of the pack in Asia. A change in the monetary settings could bring more pain for the currency, lowering its chances of leading the region for a third straight year.

After inflation cooled in January, traders will be monitoring February data this week to see if it opens the door for an easing in the MAS policy next month. The MAS targets the Singapore dollar’s nominal effective exchange rate, or S$NEER and adjusts the pace of its appreciation or depreciation by changing the slope, width and center of the currency band.

DBS Bank sees the central bank waiting a bit longer before easing its policy. “Our view is still for a slight reduction in the slope in July,” said says Philip Wee, senior currency economist at the bank.

Besides local factors, the Federal Reserve’s moves may also weigh on the Singapore dollar more than its peers. The Fed last week signaled it remained on track for three interest-rate cuts this year.

“Asian currencies underperform the Singapore dollar when the Fed’s stance keeps the US dollar firm, and recover faster when it relaxes the stance,” said Wee.

Here are the key Asian economic data this week:

  • Monday, March 25: BOJ January meeting minutes, Singapore CPI, Taiwan industrial production, Malaysia CPI
  • Tuesday, March 26: RBNZ’s Conway speaks, Australia consumer confidence, South Korea consumer confidence, Singapore industrial production
  • Wednesday, March 27: Australia CPI, New Zealand business confidence, BOJ’s Tamura speaks, South Korea business surveys, China industrial profits
  • Thursday, March 28: Bank of Japan summary of opinions to March policy meeting, Australia retail sales and job vacancies, New Zealand consumer confidence
  • Friday, March 29: Japan retail sales, industrial production and Tokyo CPI, China 4Q BoP current account balance, South Korea industrial production, Thailand BoP current account and trade balances

Source: Bloomberg