In what has already been a volatile month in the currency markets, the Monetary Authority of Singapore added to the drama with a statement that sent the jurisdiction's currency down sharply.

The Singapore dollar sank against the US dollar yesterday because the Asian city state’s central bank said it was revising down its inflation forecast for next year and reducing the upward slope of the currency’s effective exchange rate profile, suggesting a loosening of monetary policy.

Late yesterday afternoon in London time, the US dollar/Singapore dollar exchange rate was 0.7392, compared with around 0.747 prior to the Monetary Authority of Singapore’s announcement. A chart of the exchange rate shows a dramatic, straight-line collapse in the Singapore currency’s exchange rate before bottoming out.

The central bank has a policy of allowing the currency to appreciate, within a band, against a basket of currencies. However, the upward slope of the expected appreciation track has been lowered.

In its policy statement, the MAS said: “The Singapore economy remains on track to grow at a moderate pace of 2-4 per cent cent in 2015. However, MAS is reducing its forecasts for CPI [consumer price index] all items inflation and MAS core inflation for 2015. Imported inflationary pressures are receding, with global oil prices likely to stay subdued this year. While domestic cost pressures will remain, the pass-through to consumer prices is expected to be moderate.

“MAS will therefore continue with the policy of a modest and gradual appreciation of the S$NEER [Singapore dollar effective exchange rate] policy band. However, the slope of the policy band will be reduced, with no change to its width and the level at which it is centred. This measured adjustment to the policy stance is consistent with the more benign inflation outlook in 2015 and appropriate for ensuring medium-term price stability in the economy,” it said.   

The MAS announcement was a surprise to the market because, as pointed out in media reports, the jurisdiction does not normally change policy outside its regular reviews in April and October. January has already been a volatile month for the forex market, with the Swiss National Bank shocking markets with the end of its Swiss franc cap against the euro.