Fed easing prospect may boost emerging Asia

LONDON: Further gains may be in store for emerging Asian currencies that have already benefited from the prospect of easier US monetary policy in the wake of Fed chief Ben Bernanke’s Jackson Hole speech.
Markets may be underestimating the likelihood of imminent monetary easing after Friday’s speech.
Immediately after the speech, analysts broadly took the view that Bernanke had stuck to the line in the minutes of the Fed’s July 31-Aug. 1 policy meeting that further stimulus was likely fairly soon, But there was no sense new measures were imminent.
Currency markets however have already spied an opportunity.
Emerging Asian currencies such as the Malaysian ringgit, South Korean won and the Taiwan dollar , all sensitive to potential stimulus of the US economy, a key export destination, saw gains in Asia yesterday.
Such currencies could well benefit further if markets believe the Fed will indeed opt for further policy action.
Bernanke’s speech, on close reading, may support this view.
Bernanke cited “grave” concerns about stagnation in the US jobs market — remarks seen as backing the case for further monetary easing even though they were not an explicit declaration of intent to take imminent steps.
But the devil may be in the detail especially given the background against which the Fed must formulate policy.
Bernanke certainly believes in the effectiveness of non-traditional policy tools such as large-scale asset purchases (LSAP), commonly referred to by market players as quantitative easing (QE), to suppress yields and encourage economic activity.
He said four years of experience and research showed they had “significantly lowered long-term Treasury yields.”
As for any risks associated with such policy stances, “the costs of non-traditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.”
Economic conditions may indeed warrant.
If the Reuters poll consensus for an unchanged 8.3 percent August US unemployment rate on Friday proves accurate, Bernanke’s “grave concern” about the state of the labor market should only be reinforced.
In the second quarter of 2012, the percentage of US companies beating revenue forecasts was the lowest since 2009.
The fact that Thomson Reuters data showed that for every company delivering a positive outlook, nearly five gave negative outlooks, does not bode well for private sector job creation.
Third-quarter US earnings estimates are down sharply, and show a year-over-year decline of 1.8 percent. That would be the first quarter of negative growth in three years and should again give the Fed cause for thought.
Bernanke also said “uncertainties about fiscal policy, notably about the resolution of the so-called fiscal cliff and the lifting of the debt ceiling, are probably also restraining activity.”
“It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs,” he said.
That may be a forlorn hope amid the hurly-burly of a US Presidential election campaign, leaving the onus on the Fed to compensate through further monetary policy accommodation.
At last week’s US Republican convention to nominate Mitt Romney as the party’s presidential candidate, Hollywood icon Clint Eastwood’s ad-libbing with an empty chair garnered more attention than policy initiatives.
Setting the detail of Bernanke’s Jackson Hole speech against this overall economic and political background, the market may be indeed underestimating the probability of further monetary easing by the Fed at its Sept 12-13 meeting.

— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.