MAS holds as expected, but change in CPI forecast triggers slight short-cover
Earlier today the Monetary Authority of Singapore (MAS) announced it was leaving the centre, width and slope of its NEER policy band unchanged. The policy decision was widely expected, but both SGD spot and interest rate swaps reacted to a change in MAS 2014 headline CPI forecast, which was cut reflecting reduced housing cost inflation pressure. The forecast for core CPI, which does not include housing (and is the primary MAS inflation measure), remained unchanged. In spite of continuation in core CPI outlook and continued MAS vigilance on labour market inflation, USDSGD rallied slightly on short covering and rates eased slightly (Figure 1). Intuitively, we think the spot price reaction was overdone, but reflects the current tentative mood of EM longs chasing momentum. After riding upward momentum in recent weeks, on the margin investors appear willing to take profit on EM long positions for any reason.
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