The Singapore dollar is gaining favor as a funding currency for carry trades as cheap borrowing costs and fading expectations for appreciation make it increasingly attractive relative to the Japanese yen, strategists say. The Monetary Authority of Singapore kept policy settings unchanged last week in a surprise move, reinforcing expectations for more limited currency gains after tightening in April and July. Strong safe-haven inflows into Singapore have flooded local money markets, pushing down forward-implied yields, a measure of short-term borrowing costs. That combination of cheap funding and low currency volatility is burnishing the Singapore dollar’s appeal for investors looking to borrow in one currency and buy higher-yielding assets elsewhere.
"Funding in the Singapore dollar is attractive due to the negative carry, as Singapore’s FX implied yields are lower relative to most peers, and from limited upside for the currency," said Abbas Keshvani, Asia macro strategist at RBC Capital Markets. In comparison, the funding in the yen is at the risk of further policy normalization from the BOJ, he added.
The Singapore dollar’s three-month forward-implied yield hovers around 1.65%, placing it among the cheapest funding currencies alongside the yen and Swiss franc in a group of 38 developed and emerging-market currencies. Three-month option-implied volatility for the dollar-Singapore dollar pair has dropped to 3.55%, posting the biggest decline over the past year among Southeast Asian peers.
The BOJ raised policy rates by 25 basis points in September, with swap markets pricing an 80% probability of another quarter-point hike by December. That hawkish backdrop has supported a 2.7% gain in the yen against the greenback in the second half of the year, compared with a 1.3% rise in the Singapore dollar.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing