Further easing by US will benefit Asian marts

KUALA LUMPUR: The US is unlikely to print fresh money under a third round of quantitative easing (QE3) because it risks feeding rising consumer prices, but Asia's capital markets may benefit if it does happen.

The Fed, which is the US central bank, launched quantitative easing in 2009, pumping US$1.7 trillion (RM5.1 trillion) to boost liquidity in the financial system and tackle deflationary risks.

QE2, involving some US$600 billion (RM1.8 trillion), was concluded last month and it was expected to generate about 30,000 new jobs per month, or about 700,000, over two years.

Standard Chartered Bank's chief investment strategist, Steve Brice, said the bar is high for QE3, but there are risks following the latest jobs report.

"Any signal of a permanent slowdown would likely trigger further policy action from the FOMC (Fed Open Market Committee), but in our view, this would require two quarters of sub 1.5 per cent growth, with weakening core inflation and little progress in reducing the slack in the labour market."

In the meantime, markets like Malaysia would benefit should the monetary measure be rolled out.

"Naturally it should be positive for the ringgit as it encourages further dollar weakness and as such could encourage flows into the stock market and bond market."

The ringgit closed at 3.0050/0080 to the greenback on Friday from 2.9990/3.0020 on Thursday.

Southeast Asia has witnessed large foreign capital inflows over the last two years in part because of the QE programmes of the Fed, which supported asset prices, both equities and debt and currencies.

Dr Chua Hak Bin, economist with the Bank Of America Merrill Lynch in Singapore, says a QE3 this year is not likely given that the threshold will be higher than QE2.

"Last fall, the US economy seemed to be slipping into a growth recession. Payroll numbers dropped below 100,000 for five months in a row (so far, we had two this time). And inflation was weak with risk of deflation.

"This time around inflation risk is much higher. So the trade-off is not as attractive," he commented, adding that the QE3 would need a combination of a stalling out of the job recovery and a renewed drop in inflation and inflation expectations.

In Credit Suisse's view, the next move from the Fed will be to hike interest rates, which will only be done well into 2012.