Why is SGD so strong? Breaking down the “Swissification” of Singapore dollar

BofA Securities reports that the Singapore dollar (SGD) is undergoing "Swissification," exhibiting increased defensive characteristics and stability during global risk-off periods, similar to the Swiss franc (CHF). This convergence is attributed to shared traits like AAA sovereign ratings, large net international investment positions, and global financial hub status, alongside Singapore's disciplined policy framework and strong external balance sheet. Consequently, the SGD's correlation with the CHF has risen, and it increasingly appreciates or stabilizes in times of financial stress, enhancing its defensive profile and reducing capital flow volatility.

Analysis

BofA Securities highlights the "Swissification" of the Singapore dollar (SGD), noting its increasing defensive characteristics and stability during global risk-off periods, akin to the Swiss franc (CHF). This convergence is underpinned by shared fundamental strengths, including AAA sovereign credit ratings, substantial net international investment positions (NIIP), and status as global financial hubs. Singapore's disciplined policy framework and non-internationalization stance further contribute to this stability.

The correlation between USD/SGD and USD/CHF has steadily risen over the past 25 years, with speculative futures positioning in CHF now tracking USD/SGD movements. The SGD has demonstrated superior risk-adjusted performance, with a three-month Sharpe ratio of 24 basis points versus USD since 2020, compared to 9 basis points for CHF. This performance is supported by SGD's higher yield and lower volatility, managed by the Monetary Authority of Singapore's (MAS) trade-weighted exchange rate band system.

Historically, the SGD weakened during crises, but recent data indicate it now increasingly appreciates or stabilizes in risk-off environments, with USD/SGD risk-reversal pricing aligning with USD/CHF. Singapore's robust external balance sheet, evidenced by NIIP exceeding 100% of GDP and SGD6 trillion in assets under management, has reduced capital flow volatility. This resilience was particularly evident during the COVID-19 shock, where portfolio outflows did not mirror the significant reversals seen in 2008-09.

Despite these similarities, BofA notes Singapore's financial markets lack the depth of Switzerland's, and MAS maintains a policy against reserve currency status. However, the SGD's real effective exchange rate (REER) has appreciated 33% over 26 years, outpacing the CHF's 20% rise, indicating sustained purchasing power. The overall strongly positive sentiment and stable tone suggest a favorable outlook for the SGD's defensive profile.

Key Decisions for Investors

• Investors should consider the Singapore dollar (SGD) as an increasingly defensive asset, akin to the Swiss franc, for portfolio diversification during periods of global risk aversion.
• Monitor MAS monetary policy and global financial stability indicators, as these factors are crucial for the SGD's continued role as a stable, lower-volatility currency with a favorable risk-adjusted profile.
• Evaluate the SGD's potential for carry and capital preservation, given its higher yield and reduced capital flow volatility compared to other traditional safe-haven currencies.