It isn’t exactly the Thai baht, but the dong was slightly devalued yesterday. Vietnam reduced its reference rate by about 1% (the reference rate is the midpoint in a currency corridor for the dong/dollar exchange value). Vietnam devalued by about 8.5% early in 2011, so it doesn’t seem to be much of a move in comparison.

But the dong follows a spate of currency maneuvers across the emerging markets, beginning to bring up ghosts of the Asian flu. There have been mainstream media stories clearly designed to alleviate any smoldering fears of currency crises across the Pacific.

BloombergBusinessweek put out a story with almost that exact headline. The analysis contained within the story largely confirms it as well, including:

“Current account positions are now mostly in surplus, which should cushion the blow from an outflow of capital, Neumann said. Banking systems also appear more robust, with better regulatory systems, higher capital buffers and lower loan-to-deposit rates.

“There are also no ‘glaring’ mismatches between assets and liabilities, he said. In the 1990s, most external borrowing was in U.S. dollars. By contrast, most of the debt that investors have taken on in recent years is in local currency, so a surge in the dollar won’t impose a spike in debt-service costs.”

While that is absolutely the case, it counts as too clever by half. Any updated Asian flu is not going to run from Thailand to Indonesia to Taiwan and Hong Kong, eventually to Korea and Japan. These countries have done exactly as the article above suggested, offering them a bit of protection against dollar turmoil or local volatility.

Rather, it is the bigger nations of Brazil, India and even China that are in the throes of currency despair right now. The rupee is at record lows against the dollar, as Indians pour money into gold to put Greshams Law to modern use. It is the primary source of not just currency weakness but current account problems for India.

Brazil is also under the heavy hand of currency devaluation, with the exception of its source – the Brazilian central bank itself. The more currency turmoil in these larger nations, now vital in the global supply chain, the more the Asian flu of 1997-98 pales in comparison while no longer fitting as a basis of comparison. The primary problem/question now centers on each nations’ respective reserve positions.

We already have a good idea that the Reserve Bank of India has been active recently supporting (but ultimately failing) the rupee. Joe Calhoun has proffered a theory that Brazil may be a large part of the US Treasury selloff that has taken its toll on global bond markets. While I tend to believe it would be minor compared to the size of demand for collateral chain disruption due to derivative repositioning, I certainly cannot discount it. It makes a lot of sense given the global context. If Joe is right, then it means the currency crisis has shifted to the next phase – forcing central banks into defending them.

In the case of India, official reserves give it around $291 billion “dry powder” to mount a currency defense. However, given the trade and current account deficits, that is only seven months of import cover. Given the state of inflation in India, if markets force further devaluation to close the gap it could set off the same kind of exploding currency chains that made Asian flu so devastating. Again, it’s not the same specific countries to be worried about, it is the success of market forces in devaluing a target.

Once currency speculators make their mark on devaluation, it is open season on other targets similarly situated. Which brings us to China.

The Chinese current account now swings to deficit with both its primary export markets (US & Europe) in the frost of economic winter. Without growth in world trade, in which China sits as the lynchpin between the resource centers like Brazil and end markets, China becomes as conspicuous as India.

It is entirely possible that the falloff in the merchandise surplus of US dollars explains the lack of liquidity currently available in Chinese interbank markets. Given the way the Chinese peg to the dollar works mechanically, there has to be tremendous pressure on the PBOC to maintain liquidity without surplus dollars to such a degree. If that is the case there, that leaves potential devaluation as the only means to re-establish former levels of financial imbalance. But given the fact that import balances have shifted, such a devaluation might unleash the same kind of furor seen in Brazil and India, not to mention further sowing instability.

Everywhere we look, we see volatility set off because global growth has clearly stalled; global trade has fallen apart altogether. Without a forward-moving system, it falls into a zero-sum game akin to currency wars and countermeasures. Instability reigns; this time without the backdrop of global momentum like the 1990’s wave of innovation.


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