Singapore Dollar Gets Kicked Up a Notch

I will start today’s Pfennig off with some good news that Chuck shared with the desk yesterday afternoon. The scans that he underwent last week came back clean, so the cancer is limited to the mass behind his eye, and hasn’t spread to any other part of his body. This was just about as good as news as he could receive, and now he heads to the eye doctor to figure out a plan to deal with the mass. He wanted me to let everyone know how much he appreciates your emails of support.

The currency markets got a shock with the revaluation of an Asian currency overnight, but it wasn’t the Chinese renminbi (CNY). Singapore revalued its currency, adjusting the Singapore dollar’s value upwards by approximately 1%. Most of the headlines regarding this revaluation called it a ‘surprise’ and ‘unexpected’; but readers of The Daily Pfennig weren’t surprised.

Earlier this week I wrote how the government had announced they would be using their currency’s valuation to combat rising inflation. And just yesterday I told investors that the Singapore dollar (SGD) would likely rise more quickly than the Chinese renminbi, as the central bank was going to let it adjust upward to combat inflation. Talk about telegraphing your next move… Those that say this was a surprise were obviously not paying attention! Hopefully some Pfennig readers acted on my advice and purchased the Singapore dollars, booking over a 1% gain in less than 24 hours.

But for those that didn’t pull the trigger, the Singapore dollar still looks like a good choice. The Singapore economy is predicted to grow over 9% in 2010, after the fastest growth in the first quarter in over 35 years. The Monetary Authority of Singapore said it will seek a ‘modest and gradual’ appreciation in the local dollar and shift to a stronger range for currency fluctuations. Even after the move yesterday, the Singapore dollar is trailing many of its Asian neighbors in appreciation versus the US dollar. On a year to date basis, the Indian rupee (INR) is still the best performing Asian currency, increasing 4.61% versus the US dollar. This compares with a YTD appreciation of just 2.12% for the Singapore dollar versus the US dollar.

Singapore’s move has encouraged those calling for a similar move by the Bank of China, but I still don’t see them making a dramatic one-off move. US Treasury Secretary Geithner said he is ‘confident’ China will pursue a flexible exchange rate as it evolves into a more market-based economy. And his boss, President Obama, urged China’s President Hu Jintao to move to a ‘more market-oriented’ exchange rate. But President Hu was quoted as saying his country would not yield to ‘external pressure’ with regard to their currency value, and that it was a sovereign issue.

The move in Singapore has focused the currency market’s attention back to the growth in the Asian region. Currency traders had been distracted by the Greek crisis and problems in Europe, but seemingly have suddenly discovered that growth in Asia has been unaffected by these events. China will likely announce today that their economy grew 11.7% in the first quarter compared with 10.7% growth in the previous three months. This would be the fastest pace of growth since the second quarter of 2007.

So growth in the Asian region continues to outpace Europe and the US, and while the Western central banks are figuring out just how long to keep their stimulus measures in place, Asian central banks will be getting more aggressive in their fight against inflation. Growth in the region continues to put price pressure on raw materials, another good sign for Australia and other commodity exporters.

The Aussie dollar (AUD) was the second best performer versus the US dollar in the past 24 hours, moving up over 0.4%. The Canadian dollar (CAD) also rallied before stalling out after it broke back through parity with the US dollar. The loonie continues to get stuck right around the $1 figure, with traders not wanting to test the waters past this level. The Canadian central bank seems to be content with the current value of their currency, but they also have a need to increase rates. The BOC would like to wait for a rate increase until the FOMC moves higher with US rates, but commodity price pressures may force an earlier move. However, recent reports on housing and employment were weaker than economists expected, lessening pressure on the central bank to raise rates. If and when BOC Governor Carney moves rates higher, the loonie will push above parity; but as long as rates stay on hold the Canadian dollar will stay right around parity with the US dollar.

Another commodity currency that gets a lot of attention from investors here at EverBank is the Brazilian real (BRL). The real has failed to follow up last year’s blistering appreciation versus the US dollar, and has stalled out during the first three months of the year rising just 0.08% versus the US dollar. But the real could be set for another big move higher as Asian growth puts upward pressure on raw material prices. Brazilian central bank President Henrique Meirelles said yesterday that his focus would be on preventing his economy from overheating as domestic demand fuels the best growth outlook he has ever seen.

Meirelles will be raising interest rates for the first time in 19 months later this month, as he tries to keep a lid on inflation. In the past, Brazil’s central bank has allowed inflation to creep into their economy as they focused on keeping the value of the real down. But the combination of higher growth and higher commodity prices will force interest rates higher, and the Brazilian central bank will have to allow the real to appreciate.

Events around the globe combined to push the dollar lower versus most of the major currencies overnight, but the selling started early yesterday morning with the release of the US trade deficit. The trade deficit in the US widened more than anticipated in February, increasing 7.4% to $39.7 billion from a revised $37 billion the prior month. Long time readers know how Chuck has focused on the ‘twin deficits’ for years, warning investors that sustained trade and budget deficits would sink the value of the US dollar. These continued trade deficits don’t bode well for the global imbalances, as the US continues to purchase more than we sell, placing more US dollars into the hands of exporting nations.

Today will be a big data day here in the US, with the release of consumer prices, retail sales, business inventories, and the Fed’s beige book. Inflation is projected to have remained contained during March, with economists predicting a 0.1% MOM rise in the overall number, and no change in the core data. The markets are also expecting an increase in the retail sales numbers for March as US consumers gained confidence in the recovery.

Strong US inflation data could be positive for the US dollar, as currency traders would look at rising inflation as a sign the FOMC would move to increase rates sooner rather than later. But higher retail sales and business inventories could have the opposite effect, as a stronger US economy could lead investors to gain confidence in the global recovery. More confident currency investors would move money out of the ‘parking spot’ of the US dollar and put the funds to work in higher yielding (and sometimes riskier) assets.

Should be an interesting morning!

Chris Gaffney
for The Daily Reckoning

The Daily Reckoning