The decision by the Monetary Institute of Singapore to tighten policy today (by revaluating the SGD peg vs the USD) has been termed a surprise though the case in favour of tightening has been building for months.  The decision coincides with the announcement of a greater than expected increase in Q1 GDP (13.1% y/y, 32.1% q/q).  In recent months expansionary PMI data, falling unemployment, strengthening retail sales and a sizzling housing market fuelled by growing foreign investor confidence all suggested that a move by the MAS may be in the offing.  Speculation that the PBoC may be primed to act in the next few month on its currency peg may also have encouraged the MAS to act.  Though the timing of Singapore's move is unlikely to have any bearing on when the PBoC will move, it does focus attention back on the strengthening Asian region.  Among the best currency performers in the region this year are the INR (which has already benefitted by a policy tightening) and the KRW.  The latter today benefitted from a credit rating upgrade from Moody's, a sharp drop in unemployment (to 3.8%) and an increase in the 2010 GDP forecast from the BoK.  While the BoK is maintaining its pledge to keep policy accommodative at present, like other regional economies Korea is likely to find additional support on a revaluation of the CNY going forward  suggesting that the risk of a BoK rate hike is on the horizon.  As domestic fundamentals continue strengthen in Korea, the declining threat of double-dip recession in fully industrialised countries can also be expected to carry on underpinning investor interest.  

The better tone in stock markets this morning (boosted by Intel), is consistent with improved risk appetite which is also evident in the softer tone in the JPY.  EUR/JPY has continued to push higher aided by comments from the BoJ's Shirakawa that very accommodative monetary policy will be maintained.  That said, the EUR has lost growth vs the pound and EUR/USD continues to struggle to push towards USD1.3700.   Despite the solid results to yesterday's Greek t-bill auction, yields further down the curve have increased today (the 10 yr Greek-Bund spread by over 21 bps) on continued concerns about the possibility of debt default in Greek going forward.  While the EU's offer of a 3 yr loan to Greece quashes the risk of default this year, fears of debt restructuring or default further down the line will remain unless Greece can prove it can live within its means and rein in its budget deficit.  The German press continue to report disgruntlement over the agreement to provide a loan to Greece meaning that the May 9 regional German elections could be another test for the EUR.  

Sterling has continued to edge higher vs the USD and the EUR based on recent better UK economic data which is soothing some of the fears associated with the hefty budget deficit.  USD/CAD is holding below parity with the better tone in the CAD fed by higher oil prices and yesterday's release of a better than expected Feb trade surplus.

Remarks from the Fed's Lacker that the Fed may replace the language suggesting low rates for an 'extended period' sooner rather than later will focus attention on Bernanke's testimony this afternoon.  The Fed's Beige book, US retail sales and US CPI data are also due.  

Jane Foley
Research Director