Strategy | ASIA PACIFIC: Nothing to declare : Nomura

Visit http://indiaer.blogspot.com/ for complete details �� ��


􀁾 Action
While markets have focused on a weakening US$ and the rising correlation between
financial assets, central banks have accumulated US treasuries at an unprecedented
rate. With many Asian economies running both current account surpluses and
negative real interest rates, FX intervention has likely added to domestic liquidity at
an equally impressive rate. In the short term, we have may have reached an interim
quarterly peak in liquidity conditions, spurring us to book profits in some sectors
dependent on velocity of money such as regional brokers and listed exchanges.
Anchor themes
Biggest risk for Asian markets is the rising probability of competitive devaluations in
G3 disrupting monetary operations through capital inflows and higher local inflation.
Measures to curb hot money inflows are likely, as central banks seek to raise local
rates without encouraging hot money. A strong dollar would signal a difficult period
for Asian financial assets





Nothing to declare
􀁣 Intervention strategies
While the US dollar has weakened during the past nine months, Asian exchange
rates have appreciated to varying degrees. As the Asian central banks have
attempted to arrest the decline in the US dollar, the intervention has brought about
a huge accumulation of US debt into the foreign exchange reserves of the
respective countries. This has also brought about the unintended consequence of
issuing large amounts of domestic currency into money markets where real interest
rates are negative and the economies are already benefiting from surplus liquidity
from firm trade surpluses. Indeed, liquidity conditions in Taiwan are benefiting from
rising loan growth and faster central bank balance sheet growth. A very strong
cocktail of liquidity.
In the short term, we would expect Asian central bank balance sheets to slow as
the rate of change of FX accumulation declines. The dollar decline to date has
been rapid and we think there is some room for the US dollar to bounce from
oversold conditions.


Intervention strategies
“Folks, we have reached our cruising altitude now, so I am going to switch the seat belt
sign off. Feel free to move about as you wish, but please stay inside the plane till we
land ... it's a bit cold outside, and if you walk on the wings it affects the flight pattern",
www.jokes.com


Historically, Asia's mercantilist policies have meant that the central banks have tended
to follow the Fed's interest rate cycle over the past three decades. With the US
consumer the predominant buyer of Asian exports, Asian central banks have kept
policy tied to the US as both their exports were priced in US dollars and also that end
demand for their goods was determined by the relative tightness or easiness in
monetary policy in North America.
The cycle has become far more complicated for the Asian central banks since China
began to dominate regional exports from 2002 and also from the Fed's ultra-loose
monetary easing from 2008. With China managing over 2.45 trillion of foreign
exchange reserves and with the Fed adopting an effective ZIRP (Zero Interest rate
Policy), the Asian central banks excluding China have found themselves squeezed
between the Fed's policy goals and China's economic cycle.
While the US dollar has weakened during the past 9 months, Asian exchange rates
have appreciated to varying degrees with the Japanese yen, Malaysian Ringitt and
Singapore $ leading the pack, and the renminbi at the back. While the Fed has only
begun a modest re-accumulation of more US treasuries under its 'QE light' program,
the fact that the balance sheets of the European and Japanese central banks have
hardly moved has been enough to weaken the US dollar by itself without portfolio flows.
As the Asian central banks have attempted to arrest the decline in the US dollar, the
intervention has brought about a huge accumulation of US debt into the foreign
exchange reserves of the respective countries. This has also brought about the
unintended consequence of issuing large amounts of domestic currency into money
markets where real interest rates are negative and the economies are already
benefiting from surplus liquidity from firm trade surpluses. Indeed, liquidity conditions in
Taiwan are benefiting from rising loan growth and faster central bank balance sheet
growth. A very strong cocktail of liquidity.
In the short term, we would expect Asian central bank balance sheets to slow as the
rate of change of FX accumulation declines. The dollar decline to date has been rapid
and we think there is some room for the US dollar to bounce from oversold conditions.