Money market rates fall on cash injection

Source : Straits Times - 1 Oct 2008

SINGAPORE’S money market rates fell yesterday after the central bank injected funds to ease credit strains caused by the global financial turmoil, traders said.

One-month interbank market rates fell to 1.85per cent yesterday from 2.06per cent on Monday, and retreated from a nine-month high at 2.275per cent hit last Friday.

Singapore’s overnight rates fell to 0.875per cent yesterday from 2.125per cent on Monday, traders said. They added that the falling money market rates indicated that the Monetary Authority of Singapore (MAS) had injected money.

‘No doubt the MAS will be there to stabilise the money market conditions, but they are dealing in a global environment that has turned irrational,’ said Mr Claudio Piron, a currency strategist at JPMorgan Chase in Singapore.

‘There are signs around the region that counter-party risk and risk aversion are starting to push rates high as banks limit their credit,’ he said.

The MAS may have sold United States dollars in recent weeks to support the weakening Singdollar, which required it to add liquidity into the local market to help offset the effect of such intervention, analysts said.

Singapore’s interbank rates had long been held down by steady inflows of foreign money, which put pressure on the Singdollar to rise and in turn forced the MAS to buy US dollars to curb its strength. It then released money into the local money market, keeping rates low as it failed to sterilise the intervention, analysts said.

But the picture has changed in recent weeks as the global credit turbulence has prodded foreigners to dump Singapore’s stocks, which have fallen by a quarter since early June.

‘Outflows and concerns over counterparty risks naturally put some upside pressure on the US dollar against the Singapore dollar,’ said Mr Yeo Han Sia, a currency strategist at Bank of America.

Reflecting the trend of capital outflows and weakening exports, Singapore’s foreign exchange reserves fell by US$4.86billion (S$7 billion) in August to US$170.1billion.

The Singdollar fell to 1.4345 against the greenback yesterday, down some 6per cent from its record high of 1.3453 hit on July15 amid a regionwide squeeze on the US dollar funding.

Most analysts expect the MAS, which steers monetary policy by managing its currency within an undisclosed trading band rather than adjusting interest rates, to slow the pace of currency gains when it reviews policy on Oct10.

The central bank shifted the centre of that band upwards in April to try to quell inflation, which has started easing.

Mr Mark Tan and Mr Michael Buchanan, analysts at Goldman Sachs, said in a note that they expect the Singdollar to fall to 1.45 and 1.47 against the US dollar over the next six and 12 months.