Singapore Dollar’s “Swissification” Uncovered: Why It’s Winning the Global Stability Stakes
Summary of "Singapore Dollar Exhibits Characteristics Similar to Swiss Franc"
The Singapore dollar (SGD) has shown a convergence in behavior with the Swiss franc (CHF), according to BofA Securities. This phenomenon, dubbed the "Swissification" of the SGD, reflects the currency’s defensive and stable nature during risk-off periods, similar to that of the CHF. Despite their geographical and scale differences, Singapore and Switzerland share essential traits that underpin the behavior of their currencies.
Key Characteristics Shared by SGD and CHF
BofA’s analysis reveals that several key characteristics shared by SGD and CHF contribute to their behavioral similarity. Both countries hold AAA sovereign credit ratings, maintain large net international investment positions (NIIP), and serve as recognized global financial hubs. Neither country actively seeks reserve currency status, with Singapore maintaining a policy of non-internationalization to preserve its monetary framework.
Correlation Between USD/SGD and USD/CHF
A 25-year correlation study shows that speculative futures positioning in CHF closely tracks movements in USD/SGD. This suggests that global investor behavior now affects both currencies similarly, contributing to the convergence described as "Swissification." Hedge fund and proprietary trading activity in SGD has increased, but these flows remain smaller than institutional and trade-related transactions.
Risk-Adjusted Performance and Volatility Comparison
Since 2020, the average three-month Sharpe ratio for being long SGD versus USD was 24 basis points, compared with 9 basis points for CHF. Over the longer term, SGD’s higher yield and lower volatility due to MAS’ trade-weighted exchange rate band system have supported its performance.
Common Behavior in Periods of Financial Stress
Both currencies now exhibit comparable behavior during periods of financial stress. During past crises like the global financial crisis and early stages of the COVID-19 shock, SGD typically weakened. However, more recent data show that it appreciates or stabilizes in risk-off environments, with USD/SGD risk-reversal pricing aligning more closely with USD/CHF.
Differences between Singapore and Switzerland
BofA notes key differences while highlighting similarities. Singapore does not aim for reserve currency status, as reiterated by MAS officials. Its financial system, although large, lacks the market depth of Switzerland’s markets. The country still serves as a significant financial hub, with assets under management reaching SGD6 trillion at end-2024.
External Balance Sheet and Policy Credibility
Singapore’s external balance sheet and policy credibility have reduced the volatility of capital flows during the 2008-09 financial crisis, where portfolio outflows reached nearly 40% of GDP. In contrast to that experience, no such reversals were observed during the COVID-19 shock.
Enhanced Defensive Characteristics
BofA attributes SDS’s enhanced defensive characteristics to its disciplined policy framework, large foreign asset base, and steady external position. These factors significantly contribute to the convergence with CHF seen in USD/SGD movements.
Conclusion
The SGD exhibits an increasing similarity with the Swiss franc due to shared core traits that underpin their currency behavior. The correlation between USD/SGD and USD/CHF has risen steadily over the past 25 years, suggesting global investor behavior now affects both currencies similarly. Singapore’s external balance sheet, policy credibility, and steady position contribute significantly to its enhanced defensive characteristics.
