(Bloomberg) -- The Singapore dollar is gaining favor as a funding currency for carry trades as cheap borrowing costs and fading expectations for appreciation make it increasingly attractive relative to the Japanese yen, strategists say.
The Monetary Authority of Singapore kept policy settings unchanged last week in a surprise move, reinforcing expectations for more limited currency gains after tightening in April and July. At the same time, strong safe-haven inflows into Singapore have flooded local money markets, pushing down forward-implied yields, a measure of short-term borrowing costs.
That combination of cheap funding and low currency volatility is burnishing the Singapore dollar’s appeal for investors looking to borrow in one currency and buy higher-yielding assets elsewhere. It also offers an alternative to the yen, the traditional carry-trade funding currency, as Bank of Japan rate hikes raise borrowing costs and increase the risk of further currency appreciation.
“Funding in the Singapore dollar is attractive due to the negative carry, as Singapore’s FX implied yields are lower relative to most peers, and from limited upside for the currency,” said Abbas Keshvani, Asia macro strategist at RBC Capital Markets. In comparison, the funding in the yen is at the risk of further policy normalization from the BOJ, he added.
The divergence between the two central banks highlights the shift. The BOJ raised policy rates by 25 basis points in September, with swap markets pricing an 80% probability of another quarter-point hike by December. That hawkish backdrop has supported a 2.7% gain in the yen against the greenback in the second half of the year, compared with a 1.3% rise in the Singapore dollar.