KSTR - Weekly Commentary: World-Wide De-Risking/Deleveraging
2024-04-20 05:05:59 ET
Summary
- We can assume that global carry trades have mushroomed over recent years to the Trillions, with speculative leverage seductively bolstering liquidity and asset prices virtually everywhere.
- Losses are mounting throughout Asian currency markets.
- China's vulnerable currency is today tethered to a surging dollar, while its struggling export sector confronts competitors benefiting from devalued currencies.
Despite close calls Saturday night and again on Thursday night, we at least made it through the week avoiding "the start of WWIII." I'm afraid the same cannot be said for the beginning of WWDD (World-Wide De-Risking/Deleveraging).
Key speculative leverage epicenters were under notable pressure this week - global bond markets, EM currencies and bonds, and big tech.
Some Headlines: "Resurgent Dollar, Higher Yields Send EM Currencies to 2024 Lows"; "US Nods to 'Serious' Japan, S. Korea Concerns Over Slumping Currencies"; "Korea Discusses Currency Concerns with Japan, Ramps Up Jawboning"; "Indonesia's Plunging Rupiah Twists the Policy Plot"; "Indonesia Ramps Up Steps to Shield Economy From Strong Dollar"; "Philippine Peso's Drop Past 57 Puts Pressure on Central Bank"; "Japan's Yen Hits a Fresh Three-Decade Low of 154"; "China Pledges to Steady Yuan as Asian Currencies Come Under Pressure."
Under the Friday Bloomberg (Marcus Wong) headline, "'Super Peso' Slides as Middle East Risk Threatens Carry Trade": "The Mexican peso slumped the most in four years, as increasing conflict in the Middle East sapped demand for the currency that has been one of the favorite targets for carry trades. The peso tumbled more than 6% against the dollar as news began to filter through Friday of an Israel retaliatory strike on Iran, in what some in the market described as a 'flash crash.' The currency had climbed to the strongest in almost nine years last month, driven by relatively high local interest rates and low currency volatility."
We can assume that global "carry trades" (borrow in cheap currencies to lever in higher-yielding instruments) have mushroomed over recent years to the Trillions, with speculative leverage seductively bolstering liquidity and asset prices virtually everywhere. Such massive speculative leverage has become untenable.
So-called "flash crashes" are anathema to leverage. And with the Mexican peso a major (and favored) EM currency, Thursday night's market dislocation confirmed the backdrop has turned precarious for "carry trade" leveraged speculation.
April 19 - Bloomberg (Catherine Bosley and Matthew Burgess): "Central banks from Jakarta to Seoul intensified the defense of their currencies, as Asia's struggle against a resurgent dollar faced a fresh challenge from reports of armed conflict in the Middle East. Bank Indonesia increased its interventions on Friday to support the rupiah and urged government-backed firms to avoid making huge dollar purchases. The State Bank of Vietnam's deputy governor said it was ready to intervene in the foreign exchange market… With the won shy of a 17-month low against the greenback, South Korea pledged to respond immediately to excessive currency market volatility. Asian currencies have slid precipitously against the dollar as investors lose hope of imminent reduction to US borrowing costs."...
Weekly Commentary: World-Wide De-Risking/Deleveraging