Flipping through the markets
Contrary to analyst expectations, the MAS decided to leave the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) policy unchanged in its April Monetary Policy decision. The central bank cited, “With imported inflation turning more negative and core inflation expected to ease materially by end-2023, … the S$NEER policy band is sufficiently tight ....”
Although MAS does not reveal the exact currencies in the S$NEER basket, we can approximate the basket currencies by examining Singapore's trading counterparts. Since October 2021, the Singapore Dollar (SGD) appreciated against the MYR, CNH, EUR, and JPY as MAS appreciated the currency. However, the USD remains an outlier, as it strengthen against SGD.
This brings us to look at the SGDCNH pair. By utilizing the USDCNH and USDSGD currency pairs, we can construct a more extensive lookback period. This becomes crucial when we observe that the SGDCNH pair is currently trading right at a resistance level that spans over two decades. The SGDCNH FX Futures price is also overlayed to indicate its current trading level.
The line in the sand for the Nikkei 225 Index is once again tested. With the 28,400 level marking the upper range for this Japanese index. Barring surprises, we expect this index to maintain its range-bound nature for the time being.
The FTSE Vietnam 30 Index has retraced 43% from its peak at the start of 2022, marking a round trip from October 2021 to January 2022 and now. Currently, the index is trading within a symmetrical triangle pattern, approaching the bottom side of the triangle. A breakdown could signal the next phase lower for the index.
What’s inside our playbook?
The recent unexpected decision by the MAS to maintain its current policy has captured our attention. Analyzing the statement, we identified several key points that are worth pondering over.
On growth - “Singapore’s GDP growth is projected to moderate significantly this year, in line with the global goods and investment cycle downturn.”
On Inflation - “MAS Core Inflation will stay elevated in the next few months, as accumulated business costs continue to feed through to consumer prices. However, it is expected to slow more discernibly in the second half of this year.”
Singapore's open economy necessitates effective exchange rate management to strike a balance between imported inflation and export competitiveness. As illustrated in last month’s piece, Singapore's inflation figures rank highest among Southeast Asian economies but are still lower than those in the EU and UK.
The impact of an appreciating S$NEER is evident when examining the SGD against Singapore's trading partners, such as the CNH, MYR, EUR, and JPY. All four currencies traded higher when paired against the SGD consistently from October 2021 to October 2022. However, the currency appreciation strength has diminished as the four pairs have traded flat since October 2022. In our view, the MAS easing off the appreciation 'gas pedal' signals a turning point in these currencies, which we anticipate will trade lower.
From a price action standpoint, both the Nikkei 225 and Vietnam 30 Index are currently in precarious positions. The Nikkei 225's range remains clearly defined, and with the short-term uptrend now broken, we see the potential for further downside in the absence of any surprise announcements. The Vietnam 30 Index has fully retraced its nearly 80% run-up from September 2020 to January 2022 and is now trading lower. This represents a significant range for an index over a two-year period.
Executing the plays
A hypothetical investor can consider the following two trades1:
Case Study 1: Short SGD/CNH FX Futures (SY)
We would consider shorting the SGD/CNH, taking into account the slowing of SGD currency appreciation and the technical position, using the SGD/CNH FX Futures (SY) contract at the present level of 5.1875. Setting the stop at 5.25 and the take profit at 5.05. Each 0.0001 move in the SY contract is 10 CNH.
Case Study 2: Short Nikkei 225 Index Futures (NK)
We would consider taking a short position on the Nikkei 225 Index Futures (NK) at the current level of 28,550. To control risk in case of a breakout, we set a tighter stop at 28,900 and the take profit level at 27,550. Each 1 point move in the NK contract is 500 JPY.
Original Link: https://www.sgx.com/research-education/market-updates/20230428-sgx-traders-playbook-facing-resistance
Examples cited above are for illustration only and shall not be construed as investment recommendations or advice. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios.