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Macro and Vol Commentary

USDSGD has seen SDG strength in the last few months, but with China’s data poor and a resilient dollar, will this trend continue?

Singapore Data

  • GDP data is resilient, with Y/Y data showing at 4.4% for Q2 but declined by -0.2% Q/Q. This was a significant miss on market expectations, and the Ministry of Trade and Industry has downgraded its expectations for GDP for the year.
    • Growth in Q2 was weighed by external-facing sectors like wholesale trade and manufacturing, but the sectors most impacted by the pandemic continued to rise.
      • Retail trade declined by 6.9% Y/Y
      • Accommodation declined by 5.3%
    • Headwinds to the global economy will continue to slow growth, especially for Singapore, which is so reliant on global trade; we expect GDP for 2022 to be at 3.5%.
    • This risk is particularly prevalent for 2023, with tighter monetary policy and weaker end-user consumption taking hold of the economy.
    • The government expects moderate quarter-on-quarter growth for the remainder of the year whilst ruling out the possibility of a technical recession.
  • Inflationary data show pressures are rising, and CPI Y/Y was 6.7% in June and core at 4.4% - the highs not seen since 2008. The NSA M/M figure grew by 1.0%, and the weakening of commodity prices will provide some respite for inflation.
    • Business cost pressures are rising, and we expect power and electricity prices to trend higher for the remainder of the year.
    • Non-cooked food inflation was stronger than expected while retail goods, foods, services and transport accelerated.
    • Inflationary pressures will be strong in the coming months despite the easing of supply chains.
  • Retail sales are still strong on a Y/Y basis at 14.8%, but M/M, they show signs of weakness, and this will deteriorate as costs of living rise with inflation. The unemployment rate is 2.1% as of June and this will provide resilience for domestic consumers.
  • Manufacturing PMI is still marginally expansionary at 50.1 but declining, confirming the deteriorating economic data. We could see this data contract in the coming months as the economy continues to slow.
  • Industrial production is falling as well, with M/M data at -8.5%, down from 10.9% the month prior. This is a sharp swing for monthly data, and the Y/Y data also declined by 2.2%, showing the weakness in the economy.
  • Home sales, however, rebounded in July, jumping to the second-highest level this year, as buyers showed the prevailing appetite for property despite the rising interest rates environment.
    • More so, the property sector has been bolstered by an influx of funds from China, where the sector is deteriorating at a sharp pace.
  • Exports continue to outperform, with the non-oil domestic figure for July at 7.0% y/y as shipment of non-electronic products eased.
    • This is down from the June figure, which was also revised down from 9.0% to 8.5% y/y.
    • The weakness could be a sign of softening domestic demand conditions in China and HK due to ongoing covid restrictions.
    • We expect this momentum to cool in the coming months as the global demand outlook deteriorates further.
    • The only strong performance was seen in the electronics sector, which has seen a continued increase in outflows, with exports growing by 10.3% Y/Y

Central Bank

  • The central bank aims to diminish further damage to its post-covid recovery through the tightening of monetary policy and subsidies to support the most vulnerable households.
    • The CB tightened its monetary policy in July, the second surprise move this year.
    • The MAS uses FX as its main policy tool and, in its meeting, allowed the local currency to appreciate by re-centring the mid-point of the policy band to prevailing levels.
    • Core inflation estimates were also revised to 3.0-4.0% from previously 2.5%-3.5%.
  • Policymakers stated that they are bracing for further volatility given the looming recessionary environment globally.
  • At the same time, the next prime minister already signalled his willingness to increase tax on the wealthy to protect the most vulnerable groups against the impacts of inflation.

US

  • Inflation data softened month-on-month, a much-needed respite that the markets were anticipating
    • The figure grew by 8.5% Y/Y and remained unchanged month-on-month
    • This is not yet enough to mark a trend, however, lower energy prices should help alleviate some of the pressures, at least in the near term.
      • Gasoline prices fell by 7.7% and were offset by food and shelter.
      • The food prices continued to rise, increasing by 1.1% m/m.
  • So, inflation is definitely shifting away from volatile to more core components of living.
  • And while we expect the reading to soften slightly in the coming month, the core index is set to increase in its weight as households feel the bite.
  • US PPI followed the trend after the price fell by 0.5% m/m unexpectedly in July, for the first time in two years, a reflection of softer energy costs.
  • The Federal Reserve said that this does not warrant the halt of further interest rate hikes, and some policymakers see interest rates reaching as high as 3.9% by the end of this year.
    • Swaps point to forecasts of a 50bps hike by the Fed in September.

The USDSGD jumped higher recently, especially after Singapore's cautious export figures for July. The surprise hike in July has given the SGD a boost, but with both the US and Singapore monetary policy meetings not taking place until September, the steam has run out. We expect the dollar strength to prevail, trading mostly range bound in the meantime. Whereas the SGD could feel stronger signs of weakness on fears over the state of the global economy, especially following deteriorating China’s performance.

Source: Monetary Authority of Singapore, Singapore Institute of Purchasing and Materials Mgmt., Singapore Ministry of trade and Industry, Enterprise Singapore

USDSGD Vol comment

Over the course of the year USDSGD has generally realised lower than implied, with SGD often considered an Asia haven and being a currency semi-actively managed by the MAS. However as mentioned above in the face of a Global economic slowdown, ongoing supply chain issues and Singapore’s position as a trade hub we see potential for USDSGD to head back up into year end, with the effects of Winter and rising energy costs hitting Western economies and crushing spending capacity ahead of the usual busy Christmas shopping period. Below we suggest a trade idea benefiting from USDSGD heading back higher and offsets the premium cost of the long option with a short put spread bearing in mind the current trend of lower realising vols than implied.

Trade Idea

  • Buy USDSGD 3 month European Digital Call, pay off 100k USD, strike 1.4100, cost circa 24k USD Premium
  • Sell USDSGD 3 month European Put Option, 10m USD notional, 1.3750 & 1.3650 strikes, receive circa 23k USD Premium
  • Total initial Premium receive circa 1k USD Premium

Positioning Charts

USDBRL NDO Positioning Data 04/08/2022 - 11/08/2022

Options traded in the week to August 18th suggests lack of appetite, volumes were low for puts and calls. Put options with an expiry in the near term suggests that we could see downside in the near term. Options have a greater notional value suggesting higher conviction. 

USDBRL NDO Positioning Data 11/08/2022 - 18/08/2022

USDCNY Vanilla Positioning Data 04/08/2022 - 11/08/2022

The options market was outlined a stronger trend to the upside, volumes are greater than last year and this could trigger gains in the near term. Call options are with an expiry in the near term suggest a shift to the upside. There is little downside cover but weak Chinese data does not lend itself to higher CNY. 

USDCNY Positioning Data 11/08/2022 - 18/08/2022

USDSGD Positioning Data 18/06/2022 - 18/07/2022 

Options positioning for USDSGD shows a downside preference in the near term as traders expect the MAS to raise rates to combat inflation against a backdrop of slower rate hikes from the Fed. Put options with a lower notional value suggests that conviction is low but the conviction rate grows as we move through August and the range widens to 1.33, whereas on the upside there is little cover with calls trading to 1.40. 

USDSGD Positioning Data 18/07/2022 - 18/08/2022

Charts and Tables

FX Expiries

Volatility Grid

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change

Key Events & Releases

Technical Analysis

JP Morgan Global FX Volatility 

 

The index has gained ground so far this week, breaching 10.50 levels to find resistance at 10.76 today, and the index settled at 10.66. The stochastics are falling out of the overbought, and the MACD diff is positive and about to converge, signalling a change of momentum in the near term. The gains have not been well bid, and the most recent candles struggled above 10.76, indicating potential momentum on the downside. If support at 100 MA at 10.55 is broken, we could see the index edge lower through the 50 MA level to 10.26. On the upside, if support at these levels holds firm, it could trigger gains back to 200 DMA at 10.99 and 11.00. The indicators and the near-term resistance to a change of momentum, and we expect the index to weaken in the near term.

Dollar Index 

 

The index gained ground this week, with protracted buying pressure prompting a break of resistance at 106 before testing 107.78 today once again. The indicators are showing further upside potential, with %K/%D diverging on the upside in the overbought; MACD diff, however, is positive and converging, suggesting that the upside momentum might be over. The reaffirmation of support at 107 could set the scene for a break of resistance at 108. A break of this level would confirm the trend on the upside to trend resistance at 108.33. On the downside, if resistance at 107.7 holds firm and support at 200 DMA support at 106.70 breaks, this would set the scene for lower prices to 50 MA at 106.15. Short candle bodies and indicators point to a diminishing upside in the near term, and we could see a change of trend in the near term.

USDSGD

 

The pair has improved in recent sessions, breaching resistance at 200 MA and now stands at 1.3880. The stochastics are diverging on the upside in the overbought as the MACD diff is converging on the downside, suggesting we could see the pair push lower in the near term as it peaks. The index needs to hold above 200 DMA at 1.3874 before targeting 1.39. The reaffirmation of support at that level would suggest strong upside potential. On the downside, rejection above 1.38 could trigger a break of support at 100 MA at 1.3784 and then 1.3771. We expect the pair to gain footing in the near term, as it broke above the 200 MA level, this would confirm the ascending triangle formation.

Contents

Disclaimer

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