Asiamoney.com: Is the Singapore dollar the new safe haven?

Asiamoney.com, September 2011

When the Swiss National Bank set a ceiling on the Swiss franc-euro exchange rate earlier this month, there were two key questions. One, does that mean the end of the Swiss franc as a safe haven currency? And two, if it does, then what takes its place?

On the first question, some big names are already calling a reversal in the Swiss franc’s fortunes beyond the 9% decline it experienced on the day of the SNB’s intervention; Goldman Sachs Asset Management chairman Jim O’Neill, for example, has said the Swiss franc may well fall back to parity with the US dollar before the end of the year, and drop well below its new cap against the euro.

But in Asia, it’s the second question is particularly interesting. Clearly the yen, somewhat bafflingly given Japan’s economic challenges, has already served something of that haven role, but Japan’s central bank has already taken efforts to alleviate the strength of its currency and is likely to do more. Instead, the currency that has received the most attention in this region is the Singapore dollar (one of O’Neill’s favourite alternative safe haven currencies). And this is of particular interest to the private banking community.

Lee Boon Keng is an example of a Singapore-based private banker who believes there are good times ahead for the Sing dollar. Look out for the private banking report in our October edition for more on his theme, but in summary he believes the Singapore dollar will become the new safe haven currency due to similarities in the two economies, and factors that give international investors comfort such as Singapore’s rule of law and its familiarity as a world financial centre, with good governance. He considers a strong Singapore dollar “one of the things that is least uncertain” in an otherwise endlessly uncertain world. Singapore is, after all, a AAA-rated economy, which can no longer be said of the USA.

Not everyone sees it that way. UBS’s chief investment strategist in the wealth management team in Singapore, Kelvin Tay, says the government bond market is too small and illiquid for Singapore to have meaningful safe haven status – plus, he thinks the inflows would be problematic for the Monetary Authority of Singapore, which manages monetary policy through the exchange rate, and could well be resisted. Even before the Swiss franc’s cap, there were murmurings of unrest at the MAS, which had already allowed the Sing dollar to rise 6.5% against the US dollar in the year up to August; it never comments on interventions but was believed to have stepped in to currency markets that month to prevent the US dollar falling below US$1.20 (it’s at US1.23 today).

Others say the correlation between the Singapore dollar and investor sentiment makes it riskier than safe haven investors would like – a claim that is also made about other safe haven candidates, the Norwegian krone and Swedish krona. But there’s little doubt that, whether investors call it a safe haven or a leveraged bet or a play on the relative strength of emerging markets, the Singapore dollar is going to receive more inflows; and even if the MAS intervenes to stop the currency soaring, it doesn’t look at all likely to deteriorate. In a difficult market environment, that’s enough for many investors. The next question: what to do with your Sing dollars once you have them. Don’t be surprised to see strong-yielding, stable REITs start to attract more interest.