QE – them, you and me
There are now at least 5 major central banks officially on QE – Fed, BOJ, BOE, SNB and the latest ECB. Some matter more to ‘them’, some matter more to us – us being the Singaporean and Asian bunch. Among these QEs, the Fed’s QE has impacted Asia the most, Singapore being the biggest beneficiary for three obvious reasons – first, it’s the US, the world’s #1 trade partner; second, they print USD which is the world’s #1 reserve currency so the moment the Fed prints more greenback, everyone eventually gets some extra; third, the Fed’s QE is ‘unsterilized’ unlike most others.
Like all good things, QE has its side effects – excess liquidity and inflation, i.e. low interest rates and high COE prices in case you don’t know exactly what they are. And these side effects manifest themselves especially when the QE is successful. Perversely, the Fed’s QE has worked too well for us in Asia rather than in the US (which is why they are now talking about QE3), we are getting the amplified side effects rather than the US.
So now, two questions, how can we counter QE? Why aren’t the other QE benefiting us and if not, should we care less?
First question – how can we counter QE? On surface, this looks like too simple a question. Why, so easy – to counter other people’s QE, you embark on your own QE. Well, you can, then you just end up amplifying the QE side effects. Why do some central banks think they need to expand their own balance sheets to counter the QE of others? This is what the SNB did – they committed themselves to buying unlimited amount of EUR in order to keep a floor to the EURCHF exchange rate at 1.20, i.e. keep the swissie from appreciating against the euro. Doing so, they, the SNB, too has committed to printing unlimited amount of CHF and in this case, it goes into any market participants in the global FX market. If you still don’t believe the SNB, you keep buying the CHF and then the SNB will keep giving you more and more to make sure the EURCHF exchange rate is stable at 1.20. Now, this is QE! As long as the central bank’s balance sheet expands, it is QE. And simple accounting says – you expand the asset side, you need to balance with the liability side which is printing money.
More often than not, it would be the Swiss themselves buying the CHF and they then spend it in their own economy and cause inflation etc. So there you go – you counter others’ QE with your own QE, you get more side effects of excess liquidity and inflation.
Then what else can you do? You can do nothing. Let your exchange rate strengthens, kill some of your export competitiveness and even out the side effects of the Fed’s QE impact on your economy by way of the low US interest rates influencing your interest rates especially for SGD Sibor to stay as low which injects inflation risk. Alternatively, you sterilize the Fed’s QE by conducting your own open market operations i.e. issuing bills and repos or conduct FX forward swaps. This is what the MAS has done.
Question two – why aren’t the other QE benefiting us and if not, should we care less? Answer to ‘why’ is in the three reasons given above on why the Fed’s QE has benefited us, the Singaporean and Asian bunch. Should we care less? No, because there is the secondary effect on us. Noticed how the ECB’s QE announcement instigated a big risk rally? The ECB has not even started the QE. This is not to mention that there are these stringent conditions on the QE recipients before the ECB will start QE-ing for them. In fact, if this risk rally keeps going, the ECB does not even have to lift a finger. Unfortunately, what goes up eventually comes down and in this case, it will be a roller coaster ride. So yes, we do have to care about other QE even if we would not directly benefit from it, especially so because the ECB said it intends to sterilize its QE.
Gosh – so what does sterilized QE mean? It means on the one hand, the ECB buys the QE targeted country’s bonds (this goes into the asset side of the ECB’s balance sheet); on the other hand, it will issue short-dated bills or deposits in the interbank market to soak up the EUR cash it gave to the banks from which the ECB bought those bonds (i.e. the ECB juggles the EUR cash into bills on the liability side of its balance sheet). Doing so, there would be no excess EUR liquidity floating around so neither their banks, you or me would get any extra EUR. But it supposedly would help to hold down the bond yields of the QE target country’s bonds. This was the main reason why the EUR rallied rather than tank on the ECB’s QE announcement whereas the USD had the opposite reaction to the Fed’s QE announcement.
So much for the above QE definitions. One last word of caution about QE is the exit. How painful will it be when it comes about? Well, that’s so far away, we don’t even want to start thinking about it. Suffice to say – Singapore will get really painfully hit if the Fed starts to unwind its QE because the SGD has been the biggest beneficiary of QE on any count – be it the low Sibor rate, the hyper inflation we are facing now or the exceedingly low SGS bond yields now. And just to prepare ourselves, make some efforts to keep tabs of the Fed’s QE:
– QE1, Nov 2008 to Mar 2010: USD2.1trn combo of UST and MBS
– QE2, Nov 2010 to Jun 2011: USD600bn of UST
– QE2 Twist 1, Sep 2011: USD400bn of twisting from short end to long end up to 30y UST
– QE2 Twist 2, Jun 2012: Keep twisting further out in maturity
QE3? Seems very likely on 13 September 2012, next Thursday. Quantum? Most predict a minimum of UST1trn.
Enjoy while it lasts! Don’t waste a QE.