Currency swings have some way to run

For currencies in regional markets like Singapore, recent demand driven by uncertainty in the United States dollar is likely to hang around.

I spent some time in Lion City in late January, and the key theme was unquestionably movements in currency markets, which have surprised almost everyone I spoke to.

It goes without saying recent shifts in currency markets have been quite unusual. The $US has moved sharply, which is not uncommon — although when it does, it’s normally an appreciation, and not the decline we’re seeing at the moment.

The Australian and New Zealand dollars have been among the strongest performers, neither of which typically do as well in an uncertain environment. The rally in gold prices has been unprecedented. And the Singapore dollar has risen to its strongest level in a decade.

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These movements are particularly relevant for Singapore because it is a very currency focused economy. Trade is more than 300 per cent of gross domestic product.

Around 30 per cent of global trade goes past Singapore’s coastline, it has a very outward investment orientation, and the economy has always operated with an understanding that it is a small player in a world dominated by large ones.

The surprise, I think, partly stems from the lack of an obvious catalyst for the sharp moves we have seen. Nothing traditionally economic has sharply changed in the US of late. Growth is still solid and, if anything, expectations of easing by the US Federal Reserve are being pushed out.

But over my career I’ve come to learn that when you are a deficit economy, the balance in currency markets can change quickly if you don’t continue to signal prudence to foreign investors.

Two of the foundations of US prudence are the strength of the government’s fiscal position and the technocratic nature of the central bank. These points of institutional resilience, a traditional strength of the $US, have now become a talking point for markets.

Gold has eclipsed our $US5,400 an ounce forecast. As has the $A at US70c. And there are others. In recent days they have swung in the other direction. But the forces driving the $US lower are secular, strong and likely to be sustained. I think Singapore has some more surprises in store.

Richard Yetsenga is Chief Economist and Head of Research at ANZ Institutional