I have been watching this since it broke out a couple of days ago. Why the breakout? I think it is speculation about the Chinese allowing the CNY to appreciate (the diplomatic game seems to be that the US and China have a successful chat about Iranian sanctions, and then the Chinese relax the currency peg — this is good for China because it is a tightening of monetary policy, which is a good idea in a massive credit boom, but the Chinese won’t do it if Mr. Obama makes a fuss about it). This sounds like a binary bet on government action and therefore the kind of thing that I don’t like; but because this diplomatic game could go on for a while, and everybody knows that it would make sense for China to relax its currency peg, speculation about the situation could drive up the SGD even if the Chinese eventually do nothing — there is a market story to trade.

Why should the Singapore Dollar rise if the CNY rises? Because a higher CNY would allow the Singaporean authorities to be more relaxed about their currency rising, because it would not mean that their exports were becoming less competitive relative to those of China (assuming constant SGD and CNY prices). It is helpful that there are reasons for a higher SGD independent of the CNY story. Strong economic growth and rising inflation (due in part to the rising costs of imported commodities) in Singapore argue for a stronger SGD to help cool the economy and reduce inflation.

Technically, the market has broken below 13950, which has been a key level for many months (level shown on both charts from IG Index; short-term chart also shows stop position; entry point is last price on the chart), and re-tested the breakout this morning. I have placed a fairly wide stop because I want to be in the CNY appreciation theme — as ever with currencies, it may still be too close.

Update: How close are we to the bottom of the (undisclosed) currency band operated by the Monetary Authority of Singapore? Does the rapid reversal of the last two days suggest Central Bank intervention? The market was down at 13800 last December, which as far as I can work out was after the last change in the trading band — or at least the last public change. I am not used to trading with this kind of thing in mind, and will have to keep thinking about it.