In my previous post “Using Interest Rates to fight Inflation“, I said that the SGD has depreciated 4% against the USD. And as the US Federal Reserve (the “Fed”) hikes interest rates further, the depreciation will worsen, and the Monetary Authority of Singapore (“MAS”) will eventually be forced to either raise interest rates or sell our foreign reserves to defend the SGD.
I stand corrected, I’m sorry.
But well, I’ve always said that I’m an amateur investor, and the reason I started this blog is to learn about investing, share what I’ve learned, and stress-test it against other viewpoints. And the best way to learn is to make mistakes.
So what happened?
I was right on some points, but wrong on others.
The MAS doesn’t look at just the USD when reviewing the SGD exchange rate. It uses the SGD’s value against a trade-weight basket of currencies of Singapore’s major trading partners. This exchange rate is called the Singapore Dollar Nominal Effective Exchange Rate (“S$NEER”).
I was factually correct about the SGD depreciating against the USD. The first round of monetary tightening was announced by MAS on 14 Oct 2021. Since then, the SGD’s value against the USD has dropped from 0.736737 USD to 0.711913 USD.
The composition of the basket of currencies used to calculate S$NEER is never revealed by the MAS, to make it harder for speculators to attack the SGD.
However, Singapore’s top non-US trading partners are China, Hong Kong (China), Malaysia, Japan and Indonesia. So presumably, their currencies also play a big (possibly bigger) role than the USD in S$NEER calculations.
As you can see from the charts above, with the exception of HKD, the currencies of all of Singapore’s non-US major trading partners depreciated against the SGD.
In totality, based on the S$NEER chart released in MAS’s policy statement yesterday, the SGD has actually appreciated, rather than depreciated.
So how did I get it wrong?
I suppose I had a narrow field of vision. I import and distribute durable consumer goods, and most of my suppliers, even those from China ask to be paid in USD. None of them asks to be paid in their native currency. When I export, I also invoice for the goods in USD. So I was under the impression that almost all global trade is denominated in USD.
I’m not totally wrong. It’s a well-known fact the USD is the dominant currency used in international trade. The European Central Bank (ECB) estimated in 2021 that about 40% of international trade transactions were invoiced in USD, even though the US share of global trade was only about 10%.
However, I did not get a complete picture. In a way, since the composition of the S$NEER basket of currencies is secret, nobody else other than the MAS had the full picture. The USD is not the only currency that Singapore uses to pay for imports.
Online shoppers who like to buy from Tao Bao pay in CNY. And I suppose durian, vegetable and chicken sellers from Malaysia prefer to be paid in MYR so that they can spend it immediately on salaries and other local expenses. Japanese car and electronic companies are likely to bill their Singapore distributors in JPY rather than USD.
Central bankers are some of the smartest people in the world. Despite being heavily criticized by everyone (I was guilty too, in this instance), they know exactly what they’re doing.
So let’s leave the MAS alone and let them do their job.