Concerns over the tapering of the US Federal Reserve’s (Fed) five-year quantitative easing (QE) program, designed to stimulate the US economy in the wake of the 2007 Great Recession, appear to be steadily gaining momentum. While Fed chairman Ben Bernanke had already voiced plans of tapering during a testimony to the Congressional Joint Economic Committee earlier this May, the year-long strengthening of the housing market has raised fears that the decision to eventually end its monthly $85 billion bond purchases may not be far away.
In fact, a growing number of analysts are predicting a gradual easing of the policy from as early as January/February 2014.
Singapore and the Federal Reserve.
While any news of potential change in Fed’s policies will inevitably rattle the Asian financial market, the tapering of the QE program has raised a very real prospect of volatility. Any effect would likely hit the Singaporean market, as it has historically been highly sensitive to the Federal Open Market Committee (FOMC) policy initiatives. In a regression test report published by the Bank of America/Merrill Lynch last month, the Singaporean dollar was the worst performing regional currency in the face of a strengthening dollar. Derivative products can be used to take a position on rising or falling SGD value, including CFD trades.
However, the prospect of the beginning of the end of QE brings another type of challenge to the Singaporean economy, in the form of a drastic reduction in money supply to the financial system. Typically, the cash influx generated by QE initiatives lead to the channelling of the dollar to emerging markets like Singapore in search of higher returns. This is reflected by the consistent growth in the local M2 money supply over the past five years, which peaked at $496 billion in September 2013.
A number of local analysts are already anticipating a sell-off of local assets by foreign investors and fund managers in early 2014. However, any immediate impact could be comfortably absorbed by the country’s large external reserve, which currently stands at S$336 billion (September 2013). In addition, projections that the Fed will only raise short-term interest rates by 2015, along with an improving global growth rate, will likely cushion the impact of a sudden throttling in liquidity.
In 2010, in response to similar concerns from the local market, the Monetary Authority of Singapore (MAS) widened the band of fluctuation of the Singapore dollar exchange rate. However, MAS did not react to signals of possible tapering in early 2013, which leads many to conclude that it will likely continue with its wait and see strategy.