I have been thinking about this trade for a few days. USD/SGD fell in April in the expectation that the Chinese would allow their currency to rise and because the Monetary Authority of Singapore moved its target band for the currency and moved to an appreciation bias. I traded this move successfully. When global risk aversion spread around the world last month on the back of the Euro crisis, the SGD fell, partly because of fears of a slowdown and partly because the Chinese seemed to think that the Euro crisis made appreciation of their own currency less pressing.

I am not sure how the current situation is going to play out, but if risk assets start to rally then the SGD should do well — as the reasonable negative correlation between risk assets and USD/SGD in the correlations page suggests (the correlation with Treasuries is low, but they have been moving in lock-step recently). If risk assets fall further I will get opportunities to short them, but I have few available ways to play a turnaround. What gives me confidence in shorting USD/SGD here is the fact that the currency is managed — I estimated the likely width of the currency band and then looked at a broker’s estimate, and we both put the top of the band around the current price level. Unless the MAS changes its stance — which is unlikely given the strength of recent economic releases — this market should not have much further to appreciate. In another scenario, US equities continue to struggle but China, with its continuing boom, decides it needs to tighten monetary conditions further by allowing the RMB to rise. This would also be bullish for the SGD. All in all, the risk-reward looks reasonable from the current level, with a short-term risk rally or RMB appreciation as catalysts, albeit that the argument is heavily dependent on guessing the limits and rigidity of the currency band.

I saw a chance to get in this morning with a stop at 1 ATR, as shown.