Greece’s Election Results and the Singapore Dollar
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Sunday’s elections in Greece resulted in what has been described as the best possible outcome for the Euro. The pro-bailout, pro-Euro New Democracy party pulled out a narrow victory over SYRIZA, while PASOK secured enough potential MPs to allow a tenuous coalition government to be formed that will re-open negotiations with the Troika on new bailout terms. The election results weren’t certified before there were murmurs out of both Brussels and Berlin to the effect of being willing to offer the Greeks better terms than the original bailout/austerity package.
How much better remains to be seen, but if SYRIZA had won the election the Troika would have been working with a far more hostile Greek government. Because of this the markets have returned to risk-on mode, with the Euro pushing past $1.27 versus the U.S. Dollar. U.S. investors can trade this pair via the CurrencyShares Euro ETF (NYSEMKT: FXE). If a government forms in Greece and there are positive steps taken towards stabilizing the situation, then the Euro will continue to rally. The Nikkei 225, gapped open past 8700. The MAXIS Nikkei 225 Index Fund ETF (NYSEMKT: NKY) will likely rally to $14 on this news, along with the Yen weakening slightly as the fear trade comes off and capital looks to chase yield for a few days.
For those of us in Southeast Asia, the growing importance of the Singapore Dollar and how it reacts to these major events in the West is a necessity to assess the rate of capital rotation. The Singapore Dollar has been in a primary bull trend versus both the U.S. Dollar and the Euro for nearly a decade and that long term trend has not been violated with recent events. In early May the USD/SGD cross threatened to break down below $1.23, but the Greek elections sparked a 5 week long fear trade across all the markets sending the Singapore Dollar up to challenge $1.30. But the market has only been able to sustain exchange rates that low in times of extreme stress. The USD/SGD cross trades in sympathy with the SPDR S&P 500 ETF (NYSEMKT: SPY). In risk-off environments money flows into the U.S. Dollar and out of both equities and growth story currencies like the SGD. The immediate reaction to the Greek election was for the USD/SGD cross to drop below $1.27, back into the February to April 2012 trading range. If this risk-on mood in equities continues, $1.25 or lower is in the cards here.
On the other hand the EUR/SGD cross has not bounced on the news at all. Singapore’s banks are heavily exposed to European debt. So, if the EU and the Euro are going to survive, at least in the near term, then Singapore’s far superior fundamentals will continue to carry this pair along its primary trend; pausing occasionally to digest the latest drama emanating from Brussels. Having carved out a new range in the past month around 1.60 there was a small bounce to 1.61 the night of the Greek results, but nothing disruptive or indicative of the start of a trending move.
Lastly it should be noted in support of Singapore’s superior fundamentals, the Singapore Dollar’s performance versus gold these past 13 months has the SGD outperforming both the U.S. Dollar slightly and the Euro a lot. The Euro has weakened versus gold 22% since May 2011, while the U.S. Dollar has lost 5% and the Singapore Dollar just 2%.
What will be interesting to watch beginning in October is how gold and silver trade in the physical Singapore markets versus the futures markets once Singapore lifts all transaction taxes associated with trading bullion quality gold and silver.
The Straits Times Index, like the Nikkei has rallied hard since June 1st when the Yen and Yuan began trading openly and the U.S. Non-Farm Payroll report produced a 4.5% spike in the price of gold. It has moved more than 5% in two weeks, and put in a close of 2811 on Friday June 15th, its highest closing price in three weeks. A follow through this week is likely. The iShares MSCI Singapore ETF (NYSEMKT: EWS), with its 3.9% yield looks poised to break out of its current range and make a run to $14.50 from Friday’s close at $13.14.
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