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    Short SGD-CAD: Long term trade - SocGen Sandeep Kanihama

    Research Team at Societe Generale, suggests that SGD-CAD is 6% off the peak but further declines will be forthcoming and the bounce off the April lows offers an attractive entry point.Key Quotes“CAD: Since the US dollar troughed in the summer of 2011, it has gained 34% against the Canadian dollar and 12% against the Singapore dollar. The result is that Canada’s real effective exchange rate has dropped by 20%, while the US’s has gained 22% and the Singaporean REER has gained 2%. In January, when oil prices were at their lows, the Canadian dollar was significantly weaker, but the bounce has lagged the underlying stabilisation in the Canadian outlook. Long CAD positions are a bet that oil prices will not make new lows (even if they don’t rally much further) and that the downgrade to Canadian growth expectations has finished.SGD: Domestic cyclical conditions are poor (softening growth, sharply deteriorating credit cycle, persistently low inflation). Structural factors (poor productivity, weak global growth, demographics, and with tighter immigration policy) keeps growth from accelerating. As such, SGD NEER should be in the lower half of the band (compared to 1.3% above the midpoint currently). Over the next 1-2 years there is a greater than even chance that the MAS will ease FX policy further, either via re-centering the midpoint lower or moving to a declining slope.Expression: Short SGD-CAD in 12m forwardShort SGD-CAD at 0.9603 (spot ref), target at 0.75 ( 22%) and a stop at 1.02 (-6.5%). The stop is slightly above the recent highs (1.0176) and offers adequate protection from short term gyrations. The trade is entered in 1yr forwards with positive carry of 40bp per year.Risks: Oil, US growth, policy measures in Singapore being rolled backLower oil prices or US growth softening (or entering a recession) would disproportionately hurt the CAD. In Singapore, rolling back macro prudential measures on bank lending or the housing market, or loosening immigration policies could substitute for easier FX policy.”

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