Singapore Dollar Emerges As New Favorite For Currency Traders

The Singapore dollar is drawing attention from investors as a top choice for funding carry trades, pushing past the traditional role of the Japanese yen. This shift happens as low borrowing costs and steady currency rates make the local currency more appealing for market players.

Policy And Yields

The Monetary Authority of Singapore kept its policy settings unchanged last week in a surprise move after tightening steps in April and July. Strong safe-haven money inflows have filled local markets, driving down short-term borrowing costs known as forward-implied yields. Abbas Keshvani, an Asia macro strategist at RBC Capital Markets, notes that funding in the local currency is attractive due to low implied yields and limited currency upside compared to peers. Meanwhile, the Bank of Japan raised rates by 25 basis points in September, with swap markets pricing a high chance of another hike by December. This hawkish move by Japanese officials has helped the yen climb 2.7 percent against the dollar in the second half of the year, while the Singapore dollar rose 1.3 percent.

Market Appeal

Data shows the Singapore dollar holds a three-month forward-implied yield of about 1.65 percent, putting it among the cheapest funding currencies alongside the yen and Swiss franc across 38 global markets. Price swings have also dropped, with three-month option-implied volatility for the dollar-Singapore dollar pair falling to 3.55 percent to mark the largest drop in the past year among Southeast Asian peers. Dwyfor Evans, head of Asia-Pacific macro strategy at State Street Markets, points out that these low rates let the currency work well as a carry funder. The central bank uses the exchange rate as its main policy tool rather than interest rates, and its recent choice to leave the policy band slope unchanged follows a pause in tightening. HSBC Holdings Plc strategist Joey Chew wrote in an Oct. 14 note that the market expects the currency to act as a regional funding tool amid downward pressure from low interest rates.

Context

A carry trade is a common financial strategy where investors borrow money in a country with low interest rates to buy assets in another place that offers higher returns. Traders watch central bank policies closely because changes in interest rates or currency values can quickly erase profits or add unexpected costs to their investments.