MAS has slightly reduced the slope of the S$NEER policy band, while keeping the centre and width unchanged. Market expectations were leaning towards a slope reduction, and the move was not a surprise, as the S$NEER has already declined from the top to the mid-point of the policy band (per our in-house model) prior to the decision. USD/SGD remained stable around mid-1.35 post-decision. The decision to lower the S$NEER slope aligns with a marked moderation in the pace of inflation, and a rise in global economic uncertainty due to potential trade policy frictions. MAS has revised down its core inflation forecast for 2025 to average between 1%-2%, compared to 1.5%-2.5% in the Oct meeting. External cost increases from possible trade frictions could be offset by weaker global demand, while unit labour costs increases in Singapore are also likely to slow as nominal wage growth ease. MAS also expects Singapore’s GDP growth to moderate over 2025, as the impact of shifts in global trade policies could weigh on the domestic manufacturing and trade-related services sectors. Overall, there are high uncertainties to Singapore’s inflation and growth outlook.
USD/CNH could stay below 7.30 for now, despite Trump threatening to impose a 10% US tariff on Chinese goods comes Feb 1. In his Davos speech yesterday, Trump spoke positively about his relationship with President Xi, saying that all that he was seeking is a fair trading relationship with China. This suggests that the outcome of US-China negotiations will drive any tariff decisions, following an earlier call between the two leaders to discuss trade, fentanyl, and TikTok. Trump has held back on introducing universal tariffs so far, but he has also directed the US Commerce and Treasury Departments to probe economic and national security risks of large trade deficits, and recommend appropriate measures.
USD/JPY is consolidating around 156 heading into today’s BOJ meeting, with markets now fully anticipating a 25bps rate hike. This means that a BOJ hike should not trigger a sharp unwind of JPY carry trades, but the JPY will take cues from BOJ’s new inflation forecasts, with markets assessing the risks of another BOJ rate hike in July. Japan’s inflation outlook is firming, with CPI today showing inflation picking up to 3.6% y/y in Dec (Nov:2.9%). This is due to higher energy costs from the phasing out of subsidies, with inflation ex-food and energy still stable at 2.4% y/y.
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