Nomura has initiated a strategic trade involving the Singapore Dollar (SGD) and US rates, targeting a 25 basis point gain by the end of March.
This move comes as SGD rates have outperformed the US since mid-January, driven by a lower Singapore Overnight Rate Average (SORA) fix, increased activity from Commodity Trading Advisors (CTAs), and expectations of slower growth due to potential tariffs under a Trump administration.
The SORA fix has averaged around 2.5% in February, with sporadic but slightly higher volumes. Additionally, the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) has risen, trading approximately 125 basis points above the mid-point of the policy band. This shift is attributed to an unwinding of market positions, leading to increased liquidity. However, Nomura views this as a temporary change, anticipating the SORA fix to rise again.
Loan growth in Singapore has been robust, particularly in December, which may reduce bank receiving in the Overnight Index Swap (OIS) market. The share of time deposits as a percentage of bank funding has decreased, further influencing this trend.
Nomura’s strategy also includes maintaining a 2s10s flattener position, with a conviction level of 3 out of 5. The firm notes that SGD rates appear expensive on an implied S$NEER metric, with the implied SGD rate now trading above the 3-month SORA rate for the first time in four years. This suggests that SGD rates may be too high relative to the basket, especially given the lack of a short-end anchor.
With markets pricing in an easing of tariff-related tensions, Nomura remains cautious about potential tariff escalations, which could impact Singapore’s growth and rekindle expectations of Monetary Authority of Singapore (MAS) easing.
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