Singapore's central bank held policy steady as expected on Thursday (13/04), saying a 'neutral' stance will be needed for an extended period as data showed the city state's economy contracted in the first quarter. (Reuters Photo/Edgar Su)

Commentary: Singapore Sounds Alert for Next Currency Ripples


JANUARY 29, 2015

Take that, Switzerland.

Asia showed it too can shake global currency markets as Singapore unexpectedly tweaked monetary policy, sending the local dollar to the weakest since 2010.

Granted, it wasn’t quite in the same league as the Swiss shock. The Singapore dollar dropped as much as 1.3 percent against the greenback on Wednesday, which is a ripple in a calm sea beside the Swiss franc’s 27 percent tsunami on Jan. 15.

It was the first emergency policy change for Singapore’s central bank since the Sept. 11 terrorist attacks in 2001, and the latest signal of increasing global jitters over disinflation and a deteriorating growth outlook.

Singapore and Switzerland have plenty in common: tax havens, favored hideout of billionaires, prudent fiscal management, snow-capped peaks (actually, we’re not 100 percent sure about that last part.)

If these two stable financial centers are preparing their currency regimes for a world of increased volatility, attention will inevitably turn to the next shoe that may be dangling.

Hong Kong dollar three-month implied volatility rose to the highest since November 2011 on Wednesday. Surely it’s only a matter of time until some bright hedge-fund spark owns up to taking a punt on the city dropping its 32-year-old peg to the US dollar.

Such bets haven’t done too well in the past. Bill Ackman, founder of Pershing Square Capital Management, said in September 2011 that he’d placed a wager on the Hong Kong dollar appreciating by buying call options on the currency.

Government officials queued up to tell him he was on to a bad thing. Ackman will “lose a lot of money,” then-Chief Executive Donald Tsang said. “He will be disappointed,” said K.C. Chan, secretary for financial services and the treasury.

The peg stayed, and Ackman moved on to softer and more profitable targets.

While nothing’s forever, with the possible exception of death and taxes, we wouldn’t bet on a different outcome this time. Singapore is in deflation — one of the motivations for on Wednesday’s move. Inflation in Hong Kong stood at 4.9 percent last month.

More importantly, Hong Kong has shown it’s willing to take the pain of a fixed exchange rate, on the up and the downside. The city spent more than five years in deflation between 1998 and 2004, and previously tolerated consumer price increases of as much as 13 percent.

A likelier target for a change in currency policy is China, where there are signs the central bank has turned to propping up the yuan as capital flows out, instead of restraining it.

The currency completed its biggest two-day loss since 2008 on Monday and traded at a record discount to the central bank’s reference rate on Wednesday. Keep watching.