Fed likely to end QE this year: Minutes

[edragon]

Malaysia Last Reported BLR : 6.60% (Effective Since 11 May 2011)

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However, for housing loan, the effective rate is about 3 to 4%. Banks will give a discount of about 3%. That was the situation in early 2012.

[freedom]

Even pundits forget there is a difference between equity and fixed income. The latter has a maturity date.

Fed just need to do nothing and let the bonds mature. That is actually quite orderly (though it does impact the monetary base but spread over longer periods than markets can remember) unless the government defaults. That's not the same thing as getting out of AIG, for eg.

SGD interest rate is actually quite correlated to the relative strength vs the basket of currencies. For example if regional currencies strengthen against USD AND there is demand for SGD, then interest rate is low. However if regional currencies strengthen but for other reasons there is little demand for SGD, then interest rate have to go up so as to strengthen the currency and maintain the NEER with the basket.

In this case if US interest rate going up because of growth recovery, then demand may go to USD and interest rate may go up in Singapore, depending how much the regional currencies move vs SGD. Hence ceteris paribas if RMB appreciates, it will cause upward pressure to our rates as SGD tries to catch up with the appreciation. (disclaimer: this is unlikely to be taught in econs/ finance 101 which doesn't believe/ assume currency control)

However if US interest rate goes up due to inflation fighting, that may have little impact on our interest rate, as our management of inflation is from exchange rate, not interest rate, as we import for consumption and re-export. Purchasing power for other countries' goods and services is more important for our inflation than the cost of money.

it is no longer so simple for FED after operation twist, which is to replace the short term treasuries with long term treasuries. So now FED is stuck with securities which could only mature after 5 years(my guess only, the average maturity should be longer than 5 years). In the next 5 years, there is not going to be any securities maturing. The only way for FED to reduce its balance sheet would be to sell the long term securities for cash and then cancel the cash.

[natnavi]

I have always thought that the US interest rate is related to SG interest rate via the following means:
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E.g.
US interest rates = 0.5%

SG banks borrows money from the US at 0.5% interest.

SG banks lends borrowed money to SG consumers at 0.7%

Therefore, netting a 0.2% profit for SG bank.

This is assuming that the USD/SGD rates remain constant.

If the SGD strengthens at 0.1%, the SG bank can either 1) net profit 0.3% or 2) reduce their lending fee from 0.7% to 0.6% (attracts more customers) and still net a 0.2% profit for SG bank.
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The above example is something that has been happening for the past couple of years now, and I believe it is one of the reasons why the property market has been growing red hot.

[CityFarmer]

I have always thought that the US interest rate is related to SG interest rate via the following means:
-----------------------
E.g.
US interest rates = 0.5%

SG banks borrows money from the US at 0.5% interest.

SG banks lends borrowed money to SG consumers at 0.7%

Therefore, netting a 0.2% profit for SG bank.

This is assuming that the USD/SGD rates remain constant.

If the SGD strengthens at 0.1%, the SG bank can either 1) net profit 0.3% or 2) reduce their lending fee from 0.7% to 0.6% (attracts more customers) and still net a 0.2% profit for SG bank.
-----------------
The above example is something that has been happening for the past couple of years now, and I believe it is one of the reasons why the property market has been growing red hot.

Not an expert on the issue, but i am skeptical on the view.

The understanding is interest rate is determined internally, with consideration of various factors which include exchange rates and others countries interest rates. There should not be a direct link but will have strong correlation since we live in a global village :D

Correct me if i am wrong

[cfa]

McConnell: tax issues over, spending cuts next

http://www.marketwatch.com/story/mcconne...2013-01-06

[specuvestor]

I thought many of our loans are kind of indirectly related to US rate. If US rate goes up, so will we despite Singapore uses exchange rates to manage currency strength. I could be wrong.

I have always thought that the US interest rate is related to SG interest rate via the following means:
-----------------------
E.g.
US interest rates = 0.5%

SG banks borrows money from the US at 0.5% interest.

SG banks lends borrowed money to SG consumers at 0.7%

Therefore, netting a 0.2% profit for SG bank.

This is assuming that the USD/SGD rates remain constant.

If the SGD strengthens at 0.1%, the SG bank can either 1) net profit 0.3% or 2) reduce their lending fee from 0.7% to 0.6% (attracts more customers) and still net a 0.2% profit for SG bank.
-----------------
The above example is something that has been happening for the past couple of years now, and I believe it is one of the reasons why the property market has been growing red hot.

Not an expert on the issue, but i am skeptical on the view.

The understanding is interest rate is determined internally, with consideration of various factors which include exchange rates and others countries interest rates. There should not be a direct link but will have strong correlation since we live in a global village

Correct me if i am wrong

I'm not sure if I'm opening a can of worms but I'll try with the best of my knowledge

The US rate is special because like I said, the current fiat system is more or less linked to the US$ rather than say the gold. The problem is while Gold supply is relatively constant growth, the US$ is not. Hence your exchange rate fluctuations vs US$ and therefore cross currencies as well.

hence so is S$ linked with US$ via the interest rate swaps. But just as forward curves are the mathematical extrapolation of FX and interest rates, BY ITSELF it says nothing about the future. The curve is priced based on current interest rate expectations and if market is so perfect, nobody should even trade FX but just take it as it is.

This then comes to the point of how one perceive the relative strength of a currency. UNLIKE equities, FX is ALWAYS in pair... it is like doing a perpetual long/short equity trade. You have to analyse BOTH legs, from GDP growth to interest rate moves to inflation to credit, etc to gauge the relative movements in future rather than just the mathematical extrapolations. So currencies are correlated in this way.

But that is assuming free-floating regimes.

In a controlled currencies, in varying degress and varying regimes from RMB, NTD, KRW to basket based SGD and currency board HKD, things are a bit different. US$ interest rates in Singapore will be determined by the offshore markets from SIBOR, TIBOR to LIBOR, etc. These depends on the localised demand and supply and how connected these money centres are for those currency they are trading, and how much the central banks are allowing the currencies to build up offshore ie supply. In short it is determined by the central banks that PRINTS it. Singapore is not going to determine the interest rates or FX of US$ or Riggit for that matter, but they have strong say in SGD. SGD is considered non internationalised because we don't allow offshore trading or commerce settlement because we are too small and might lose control of the offshore dynamics.

And that is why RMB has to slowly internationalise with selected offshore centre first because they still want to control the FX, interest rates, and liquidity of these money centres. They are starting with the current account and CNH in HK, with CNS in Singapore, and likely capital account gradually. This would have profound impact on those S-chips that claim they can't transfer their RMB money overseas, but I think short term they would still maintain strict convertibility measures ie RMB would not be fully convertible from onshore to offshores. There are theoretically objection to this premise, but I think it is feasible short term because dislocations builds so very slowly and hence won't be much impact in the short term, as long as the PBOC remembers to unplug the valves from time to time

---

Even pundits forget there is a difference between equity and fixed income. The latter has a maturity date.

Fed just need to do nothing and let the bonds mature. That is actually quite orderly (though it does impact the monetary base but spread over longer periods than markets can remember) unless the government defaults. That's not the same thing as getting out of AIG, for eg.

SGD interest rate is actually quite correlated to the relative strength vs the basket of currencies. For example if regional currencies strengthen against USD AND there is demand for SGD, then interest rate is low. However if regional currencies strengthen but for other reasons there is little demand for SGD, then interest rate have to go up so as to strengthen the currency and maintain the NEER with the basket.

In this case if US interest rate going up because of growth recovery, then demand may go to USD and interest rate may go up in Singapore, depending how much the regional currencies move vs SGD. Hence ceteris paribas if RMB appreciates, it will cause upward pressure to our rates as SGD tries to catch up with the appreciation. (disclaimer: this is unlikely to be taught in econs/ finance 101 which doesn't believe/ assume currency control)

However if US interest rate goes up due to inflation fighting, that may have little impact on our interest rate, as our management of inflation is from exchange rate, not interest rate, as we import for consumption and re-export. Purchasing power for other countries' goods and services is more important for our inflation than the cost of money.

it is no longer so simple for FED after operation twist, which is to replace the short term treasuries with long term treasuries. So now FED is stuck with securities which could only mature after 5 years(my guess only, the average maturity should be longer than 5 years). In the next 5 years, there is not going to be any securities maturing. The only way for FED to reduce its balance sheet would be to sell the long term securities for cash and then cancel the cash.

Anyone remembers that the 1998 recap bonds for Indonesia that has been maturing? The market has short memory... operation twist or not the aggregate money supply is not affected but they are trying to play with/ target the curve's segmented demand/supply, just as they are playing with MBS market though they are SUPPOSED to be priced off the treasury curve .

On the other hand, if they are actively shrinking their $3tr balance sheet, this is vastly different from concept of orderly withdrawal of stimulus. The former means they want to tighten aggregate liquidity, and fast.

[CityFarmer]

It seems i am tackling information overflow here . The only way to get out is to remain focus. IMO, the focus should be the impact of ending QE in US on Singapore interest rate, and be in layman terms

Let me starts with Singapore interest rate. Base on my best understanding, MAS does not directly control domestic interest rate, but in-directly control via exchange rate. The exchange rate control indirectly control the domestic money supply, thus the interest rate via market forces. It seems the key word is money supply/demand for interest rate

Next is impact of ending QE. I like the ending statement from specuvestor, i.e. "if they are actively shrinking their $3tr balance sheet, this is vastly different from concept of orderly withdrawal of stimulus. The former means they want to tighten aggregate liquidity, and fast.". So as far as the news is concern, it is orderly withdrawal of stimulus, rather than shrinking the liquidity. In other words, liquidity remains.

Base on the two points above. Liquidity in US remains, and there is no immediate changes of exchange rate policy in Singapore, thus money supply remains, so no major changes of interest rate is expected.

The simplified argument sound logical?

[freedom]

Anyone remembers that the 1998 recap bonds for Indonesia that has been maturing? The market has short memory... operation twist or not the aggregate money supply is not affected but they are trying to play with/ target the curve's segmented demand/supply, just as they are playing with MBS market though they are SUPPOSED to be priced off the treasury curve .

On the other hand, if they are actively shrinking their $3tr balance sheet, this is vastly different from concept of orderly withdrawal of stimulus. The former means they want to tighten aggregate liquidity, and fast.

then tell me how FED can do orderly withdrawal of stimulus without selling their treasury holdings and cancel the cash?

[specuvestor]

Read my previous posts from 6 Jan 13. In short they don't have to do any transactions in the market to create signalling effect, but just let the bonds mature

[freedom]

Read my previous posts from 6 Jan 13. In short they don't have to do any transactions in the market to create signalling effect, but just let the bonds mature

then clearly you did not read my post then reply...

the bonds FED is holding now can only mature after 5 years. What can FED do in next 3 years to shrink its balance sheet? withdraw stimulus?

You still live in a world before Operation Twist...