Singdollar could weaken to 1.425 per USD this year on coronavirus risks: Fitch Solutions

FITCH Solutions has lowered its forecast for the Singapore dollar's (SGD) 2020 average exchange rate to S$1.425 per US dollar (USD), from its previous average forecast of S$1.385, in light of the Covid-19 crisis.

The market insights firm on Monday said the currency has "clear prospects of sustained weakness" over the course of this year, given that the risks posed by the pandemic are likely to persist through most of 2020.

This could see the SGD continue to trade within the weaker short-term trading range of between S$1.41 and S$1.45 per USD over the coming months, and between S$1.34 and S$1.45 in the coming quarters.

Fitch noted that Singapore's currency has weakened further since the firm's February update, in line with its expectations for the novel coronavirus pandemic to exert depreciatory pressures.

As at April 28, the SGD was averaging S$1.3943 against the USD for its year-to-date average exchange rate, which is 0.7 per cent weaker than Fitch's previous average forecast of S$1.385 for the year.

According to Fitch, the growing Covid-19 caseload in the Republic is likely to keep the currency on a weakening path, especially with the "circuit breaker" being extended till June 1 and the possibility that it might be further extended.

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"This would weigh on growth as well as confidence towards Singapore's management of the crisis," the firm wrote.

That being said, although there was a doubling in the number of confirmed cases in one week since April 20, the SGD remained mostly stable during that time. Between April 20 and 27, it traded close to S$1.42 per USD.

The currency's relative resilience, following a sell-off in the middle of March, suggests that the Monetary Authority of Singapore (MAS) is unwilling to allow the exchange rate to depreciate much further than current levels, Fitch said. "We expect the central bank to continue supporting the currency over the coming months," it added.

For next year, Fitch on Monday revised its 2021 average exchange rate forecast downwards to S$1.41 per USD, from its earlier forecast of S$1.37, given the weaker position that the currency will likely be in by the end of this year.

"We maintain a slightly more sanguine long-term outlook for the SGD, given our expectation that Covid-19 related risks would have at least begun to recede by the end of 2020," the firm wrote.

"We continue to expect the likely economic recovery in 2021 to support a stronger SGD, but note that any upside will be limited by factors such as Singapore's diminishing growth advantage over the US." Fitch forecast a growth rate of 2.6 per cent for Singapore next year, as well as a similar level of 3 per cent growth for the US.

Downside risks to its short and long-term exchange rate forecasts include a second large Covid-19 outbreak within the local community or a longer-than-expected timeline to control the spread of the coronavirus among foreign workers living in dormitories.

These could lead to further extensions of lockdown measures in Singapore beyond June 1, which would imply further negative shocks to the city-state's already-battered economy, Fitch said. This could in turn shake investor confidence further and spark another sell-off of the currency.

In 2021, there are also risks that the SGD would suffer, if the global economy struggles to get back on track post-pandemic due to factors such as spiking unemployment in key economies including the US. This would likewise weigh on Singapore's small and open economy and thus its currency, Fitch noted.