US dollar may continue fall, but impact on Singapore stocks unlikely to be major

Fri, Jan 22, 2021 – 5:50 AM


THE US dollar (USD) could continue to trend downwards amid positive risk sentiment in markets, which could benefit Asian assets, with little downside expected for Singapore stocks with US exposure, say analysts.

Sim Moh Siong, currency strategist at Bank of Singapore said: “It is still a very risk-positive backdrop; there is still room for the dollar to weaken.”

He noted there has been a bit of rebound in the USD following the Georgia Senate runoff elections this month, as markets expect easier passage of fiscal stimulus.

This has led to US yields rising, and some concerns that the Fed may start to taper its balance sheet earlier than expected, which provided some support for the USD.

That has created a bit of “cross-current” for the USD, which typically weakens in response to risk rallies – rallies in assets such as equities and commodities, he added.

“Broadly speaking, we still expect the dollar to weaken, because we think the risk-on would be the dominant effect, and that is likely to lead to a weaker dollar,” he said.

Similarly, Pan Jingyi, senior market strategist at IG said: “For USD /SGD, there could actually still be room on the downside, and that is with positive risk sentiment seen.”

She noted that the USD could trade sideways for a while due to conflicting forces at play, but it could potentially go lower again, with mostly bearish bets in the market.

In 12 months, Mr Sim is forecasting for the USD/SGD to weaken to 1.27 from its current levels of around 1.32 on Thursday. “There could be bumps along the way, but the broad direction is a downward dollar trend.”

Ms Pan noted that a weaker USD encourages inflows into Asian markets.

“For Singapore stocks, this is a positive, (President Joe) Biden is seen as a positive factor to a large extent,” she said, noting cyclical stocks could capture recovery this year.

Analysts believe that a weakening USD may not have significant impact on Singapore stocks with exposure to the currency.

Ho Pei Hwa, analyst at DBS Group Research, noted that while offshore and marine counters such as Keppel Corp and Sembcorp Marine have contracts priced in USD, these are usually hedged, and the weaker currency is not a negative for them. She noted that a weaker US dollar would generally support commodity prices, which are mostly priced in USD.

Apart from a weaker USD, Ms Ho noted that fundamentals for oil prices are also improving, supported by the Covid-19 vaccine rollout and recovery of the sector. Stronger commodity prices could lift sentiment in the sector, and, to a certain extent, may improve order wins on production facilities, she said, adding that stock prices would more likely be driven by order wins.

Other large caps in Singapore with exposure to commodities include Singapore Airlines.

In real estate, RHB research analyst Vijay Natarajan does not expect the US dollar swings to significantly affect real estate investment trusts (Reits).

He noted the impact may be felt for Singapore Reits with a percentage of portfolio exposure to the US if there is a mismatch in currency exposure in their assets and liabilities, or if they do not hedge income from the US, as dividends are paid out in SGD.

However, he believes that the impact is not likely to be significant, as the Reits generally do have some USD-denominated debt or hedge their income exposure.

Reits that have US assets include Ascendas Reit, Mapletree Industrial Trust and Ascott Residence Trust.

Mr Natarajan does not expect the US dollar swings to affect the US Reits in Singapore, such as Manulife US Reit, Keppel Pacific Oak US Reit, Prime US Reit and ARA US Hospitality Trust.

These are traded in USD, with debt, assets and dividends also denominated in USD, and thus would not see an impact to operations arising from currency swings.

However, he pointed out that investors may delay their investment in such Reits if they view USD on a downtrend.

He said: “If you are an investor who wants to convert your currency from SGD to USD, and if you think the USD is going to decline on a longer trend, you might delay your investment decision as such.”