Anxious wait for Fed move

The market anticipates the Fed scaling back its stimulus known as quantitative easing (QE) by the small step of about US$10 billion (Bt318.59 billion) of its monthly $85 billion bond purchases.
This caused foreign capital to flow back to Thai and other Asian bourses last week after big sell-offs several weeks before. Last week, the SET Index rose to the 1,401 level, while the baht also gained ground after plunging to over 32 per dollar.
Banluesak Pussarangsi, executive vice president of CIMB Thai Bank, said last week that capital inflows might be short-lived due to the uncertainty over the Fed's move and the fact that the Fed will eventually eliminate QE.
“It’s hard to predict the direction of capital flows, but from my initial assessment there is a possibility that foreign funds will flow to Asia again as investors think that weak US employment may make the Fed delay tapering or make only a small cut,” he said.
Economic indicators have suggested a gradual recovery of the US economy, so the Fed is likely to start reeling in QE this year and scrap it completely next year, he said.
Housing prices in the US have advanced steadily and this may make the Fed alarmed about renewed property speculation, he said. Ultra-low interest rates and massive liquidity have been blamed for the speculation in property and stock prices.
The Fed may also start raising interest rates in 2015, so capital may recede out of Thailand and the rest of Asia in the medium and longer terms, he warned.
The other issue is that US government debt will hit the ceiling next month and this could create market turmoil should the Obama administration not reach an agreement with the US Congress to lift debt limits, he said.
Benjarong Suwankiri, team head of TMB Analytics, said the capital inflows that pushed the baht up to 31.6-31.7 per dollar last week may prove to be fleeting.
“As long as the market believes that the Fed will taper off its QE, this will lead to capital outflows and then the baht could fall later,” he said.
As US treasury yields have been rising at a faster pace than Thai government bond yields, it is likely that funds will flow back to the US to seek higher returns, he said
Su Sian Lim, Asean economist at Hongkong and Shanghai Banking Corporation, was optimistic.
“Some believe that the Fed will turn off the tap of liquidity. This is not the case. It will be an extremely gradual process,” she said.
 When the market calms down, investors will look at the fundamentals of each country in Asean and Thailand will still be attractive for portfolio investment, she said.
Foreign direct investment will also continue to flow into countries where infrastructure is conducive and production is available. Thailand’s export sector is expected to recover next quarter thanks to stabilised growth in China, the recovery in the US and the emergence of the EU from crisis. The global recovery will benefit the electronics and automobile-parts industries.
Pongpen Ruengvirayudh, deputy governor of the Bank of Thailand, said cautiously that the direction of fund flows will depend on how the market interprets the Fed’s decision and market reaction could lead to high volatility in the global financial market.
She was also concerned about the competitiveness of Thai exports, as technology is shifting, causing a decline in shipments of hard disk drives, a key component of desktop and notebook computers.