In the wake of taper tightening, currency markets and credits everywhere around the world are adjusting pretty much as they had previously. While the Indian rupee remains stuck in a range, the Bank of India tried to ignite growth through “surprise” interest rate non-movements.
Other markets have not been so fortunate, particularly Indonesia. While India soaked up much of the attention this summer due to its growing size (economically and politically), the rupiah was far more affected. Liquidity in Indonesia has been problematic without much pause, even if the currency fireworks abated temporarily. Just last week, Bank Indonesia (its central bank) expanded an existing swap line with the Bank of Japan.
This third bilateral swap arrangement expanded the limit to just shy of $23 billion, up from $12 billion. Further, Bank Indonesia will now accept Japanese government bonds as collateral to obtain rupiah liquidity. The move, obviously, highlights not just an ongoing currency issue, but, as with the developed world, a collateral shortage. That is not a good sign, and it links the disruptions in yen (thanks to BoJ QE) to the dollar trepidations.
In Brazil, another BRIC against the wall, the Banco do Brasil announced this morning that it will curtail the size and pace of its swaps operations. The move, coming on the same day as tapering in the US, appears on the surface to be a positive step and signaling a comfort with the real in the 2.30 to 2.40 range. I doubt either is the case, and instead the swaps program is proving increasingly ineffective as banks are now seriously underwater in their “encouraged” dollar borrowing (the Brazilian system is somewhat unique).
Where the central bank will reduce its swaps volume from $2 billion per week to $1 billion per week and eventually to zero in June 2014, Banco is actually seeking greater flexibility to contain any violent currency moves. That’s not something that usually accompanies a less restive funding market. Selling pressure has moved out of swaps demand, which would encompass hedging dollar and real liquidity positions, and into the spot market for dollars in Brazil.
The new framework also sheds the weekly limit on auctions of US$ credit lines in favor of something more aligned with “market conditions.” In other words, like its developed world central banks, Banco is making a heavy promise to supply actual dollars instead of the indirect swaps method. This may include direct spot market auctions of dollars, and would have to be sourced through swap lines with the Fed or Brazil’s stash of US$ “reserves.” The real, either in reaction to taper and dollar tightening or the change in Banco’s stance, has sold off this morning, touching 2.36 to the dollar.
In any case, this is pretty much what I expected a few months back. The swaps were never going to be enough, and were not really intended as such. They were simply a move to arrest the steep devaluation then underway and buy time for conditions to improve. That makes the latest eurodollar tightening (if that is what we end up with) all the more problematic. The World Bank issued its warning and was promptly ignored, but then there really wasn’t much Brazil could do to improve its financial standing in the wake of the collapse in global trade (delinked to the US economy or not).
In other words, these central banks have moved from buying time to trying to talk their markets into accepting unspecified and amorphous backstops. That would include, it seems, China. SHIBOR is again on the rise, though not exactly timed with the taper revelations from yesterday. But Chinese wholesale conditions are again more than problematic and there is a directly link to dollars via both the yuan peg and the short positions of Chinese corporates (that grows more short as trade dwindles).
In reality, nothing much has changed since this summer’s dramatic devaluation crisis in emerging markets. If anything, it has progressed from Stage 1 to Stage 2. Various central banks have drawn their lines of defense after retreating once; we will see how dollar conditions affect these “new” tactics. I’m not holding my breath.
Click here to sign up for our free weekly e-newsletter.
“Wealth preservation and accumulation through thoughtful investing.”
For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, contact us at: jhudak@4kb.d43.myftpupload.com
Stay In Touch