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  • 1. KBank Capital Markets Perspectives 26 April 2012Just the Federal Reserves…not Fed Ex, so QE delivery is late %The Fed decided to keep the Fed Funds rate in the target 8range of 0.00%-0.25% after the meeting on 24-25 April 2012. 7This target range has been kept since December 2008 and 6will be maintained at least through late-2014 5There was no strong signal from the Fed about the third 4round of Quantitative Easing or QE3 in the meeting at this 3time. However, the Fed Chairman Ben Bernanke said that 2the Fed stands ready to add its stimulus if necessary. 1 0The Fed also upgraded its economic forecast for 2012 in this 00 01 02 03 04 05 06 07 08 09 10 11 12month meeting. GDP forecast was raised to 2.4%-2.9%while unemployment rate was lower to 7.8%-8.0% in 2012. Fed Funds UK ECB RBA JapanThe raise in the Fed’s economic projection may reduce thechance that the Fed will introduce another quantitative easing Source: Bloombergas the U.S. economy is believed to grow well this yearbut…when look at the housing and labor markets in the U.S.,it signals that the easing may be necessary. Puttikul AckarachalanonthWe believe the Fed will probably introduce another round of puttikul.a@kasikornbank.comQE this year and based on this assumption, we foreseeUSD/THB to move lower to 29.50 at the end of this year.Disclaimer: For private circulation only. The foregoing is for informational purposes only and not to be considered as an offer to buy or sell, or a solicitation of an offer to buy or sell any security. Although the information herein was obtained fromsources we believe to be reliable, we do not guarantee its accuracy nor do we assume responsibility for any error or mistake contained herein. Further information on the securities referred to herein may be obtained upon request. 1
  • 2. Monetary policy remains unchanged Federal funds rateThe Fed decided to keep Fed Funds rate in the target range of %0.00%-0.25% after the meeting on 24-25 April 2012. This target 8range has been kept since December 2008 and will be 7maintained at least through late-2014. 6 5This time, 7 out of 17 Fed officials expected the Fed Funds rate 4to remain below 1% at the end of 2014, compared to 9 out of 17 3Fed officials in January meeting, according to figure 2 in the 2Fed’s projection material. This information showed the Fed 1officials were more hawkish than their meeting in January. 0There was no strong signal from the Fed about the third round 00 01 02 03 04 05 06 07 08 09 10 11 12of Quantitative Easing or QE3 in the meeting at this time.However, the Fed Chairman Ben Bernanke said that the Fed Fed Funds UK ECB RBA Japanstands ready to add its stimulus if necessary. Fed’s balance sheet 3,000The Fed also upgraded its economic forecast for 2012 in thismonth meeting. (Please see next page for detail of the Fed’s 2,500forecast.) 2,000The Committee will continue its Operation Twist program that 1,500started in September last year to extend the average maturity ofits holdings of securities. The Operational Twist will end in June 1,0002012. The market are either the Fed to continue its operational 500twist program after the expiration or announce another QE. - 02 03 04 05 06 07 08 09 10 11 Feds balance sheet, USD bn 2
  • 3. Fed raised economic projection in the meeting The forecast for real GDP in 2012 had been raised from the forecast in January of 2.2%-2.7% to 2.4%-2.9% in yesterday meeting as FOMC committee believed the U.S. economy has been expanding moderately. The forecast for the unemployment rate in 2012 was reduced from 8.2%-8.5% to 7.8%-8.0% after the U.S. labor market has been improved in recent months. Since the inflationary pressure has been raising recently due to the higher oil price, the Fed increased its projection of PCE inflation as well as Core PCE in 2012. However, the Fed said the increase in oil price is expected to affect inflation temporarily. Noted that the new inflation forecast is still in below 2% inflation target. Please see detail of economic projections of the Federal Reserve Board Members and Federal Reserve Bank Presidents for April 2012 in below table.Variable Central tendency RangeUnit: % 2012 2013 2014 Longer run 2012 2013 2014 Longer runChange in real GDP 2.4 to 2.9 2.7 to 3.1 3.1 to 3.6 2.3 to 2.6 2.1 to 3.0 2.4 to 3.8 2.9 to 4.3 2.2 to 3.0 January projection 2.2 to 2.7 2.8 to 3.2 3.3 to 4.0 2.3 to 2.6 2.1 to 3.0 2.4 to 3.8 2.8 to 4.3 2.2 to 3.0Unemployment rate 7.8 to 8.0 7.3 to 7.7 6.7 to 7.4 5.2 to 6.0 7.8 to 8.2 7.0 to 8.1 6.3 to 7.7 4.9 to 6.0 January projection 8.2 to 8.5 7.4 to 8.1 6.7 to 7.6 5.2 to 6.0 7.8 to 8.6 7.0 to 8.2 6.3 to 7.7 5.0 to 6.0PCE inflation 1.9 to 2.0 1.6 to 2.0 1.7 to 2.0 2.0 1.8 to 2.3 1.5 to 2.1 1.5 to 2.2 2.0 January projection 1.4 to 1.8 1.4 to 2.0 1.6 to 2.0 2.0 1.3 to 2.5 1.4 to 2.3 1.5 to 2.1 2.0Core PCE inflation 1.8 to 2.0 1.7 to 2.0 1.8 to 2.0 1.7 to 2.0 1.6 to 2.1 1.7 to 2.2 January projection 1.5 to 1.8 1.5 to 2.0 1.6 to 2.0 1.3 to 2.0 1.4 to 2.0 1.4 to 2.0 Source: Federal Reserve Government website, Release at 2.00AM on April 26, 2012 (Bangkok time) 3
  • 4. QE3 may be necessary due to situation in housing and labor markets The raise in the Fed’s economic projection may reduce the chance that the Fed US Home Buyer Affordability Index and 10-year U.S. Treasury Yield will introduce another quantitative easing as the US economy is believed to grow 220 1.50 210 well this year but…when look at the housing and labor markets in the US, it 2.00 200 signals that the easing may be necessary. 190 2.50 Recent data showed that the housing market is still a concern for the Fed. New 180 170 3.00 home sales in the US declined 7.1% mom in March; although the home price in 160 20 cities increased slightly by 0.15%. The market seemed to ignore the data of 150 3.50 the new home sales that day and focus on the pricing data instead. But this is 140 4.00 the fact that we cannot reject that the housing market in the U.S. is not yet 130 recovered to its normal level before the crisis. 120 4.50 08 09 10 11 12 Although the U.S. non-farm payroll in March increased by 120,000, market did not welcome this information as it was much lower than the survey of an increase Homebuyer affordability index, left 10yr UST, right, inverted, % of 205,000. The survey numbers were more than reported amount for eight Number of weeks unemployed in the market consecutive months (August 2011 – February 2012). This posted some sign to 45 the U.S. job market as the increase in the hiring may not continue its strength. 40 35 These are the two main reasons why the Fed should continue its easing 30 program. The Fed is trying to fix the housing market by keeping the interest rate 25 low in order to make the house affordable. Please noted that there is an inverse 20 relationship between home buyer affordability index and 10-year Treasury yield 15 i.e. as the yield is lower (and thus the interest rate), people can afford to buy 10 home more. For the labor market, the data shows that people stay unemployed 5 longer (around 40 weeks). The longer one is unemployed, the job skill 0 deteriorate and it become even harder to find a job. Thus, the Fed is under time 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 pressure for the easing and therefore, either more measures like Operation Twist number of weeks unemployed and or QE is need to keep US long rates low and boost job market. 4
  • 5. If there is QE3, what will happen to USD/THB ? USD/THB Mapping Fed balance sheet, USD/THBIf there is another round of the quantitative easing, the U.S. 110dollar will be weakening and USD/THB will be lower (i.e. baht is 105strengthening) automatically despite the fact of the fundamental y = -0.1198x + 126.77 2of Thai economy which is not yet fully recovered from the 100 R = 0.6055flooding. 95The above graph is the mapping between Fed balance sheet 309.98 90and USD/THB. The graph pictures an inverse relationshipbetween the two variables. If there is QE3, Fed balance sheet 85will become larger and USD/THB will become lower. 80When Fed prints money, some money will flow out from the U.S. 150 170 190 210 230 250 270 290 310 330to the emerging market like Asia (including Thailand) where Fed balance sheet, indexed, Jan 2008 = 100there is more opportunity for higher return. Based on the data ICI Emerging Market Equity and SET Indexfrom Investment Company Institute (ICI), it shows that when 300 1200money in ICI Emerging Market Equity Fund increases, SET 250 1000Index will also increase. This is a factor that move USD/THBlower as well because ICI fund in the U.S. needs to buy baht for 200 800investing in Thailand. 150 600In conclusion, we believe the Fed will probably introduce another 100 400round of QE this year and based on this assumption, we foreseeUSD/THB to move lower to 29.50 at the end of this year. 50 200 - 0 00 01 02 03 04 05 06 07 08 09 10 11 12 ICI EM Equity net assets, USD bn, left SET index, right 5
  • 6. FOMC Statement: release date – April 25, 2012Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately.Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated. Household spendingand business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed.Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations haveremained stable.Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expectseconomic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that theunemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate. Strains in global financialmarkets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices earlier this year isexpected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that itjudges most consistent with its dual mandate.To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, theCommittee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep thetarget range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resourceutilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate atleast through late 2014.The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September.The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee willregularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote astronger economic recovery in a context of price stability.Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke;Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against theaction was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federalfunds rate through late 2014. 6
  • 7. FOMC Statement: release date – March 13, 2012Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately.Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated.Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has beensubdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remainedstable.Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expectsmoderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually towardlevels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though theycontinue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflationtemporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dualmandate.To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, theCommittee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep thetarget range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resourceutilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate atleast through late 2014.The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September.The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee willregularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote astronger economic recovery in a context of price stability.Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke;Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against theaction was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federalfunds rate through late 2014. 7