Submitted by Jeffrey Snider – Alhambra Investment Partners
And so it goes, back to the Asian “dollar” again. The reverberations back and forth are nothing if not remarkable, revealing, I believe, some very real divisions between the general and “traditional” eurodollar and the new(ish) Asian “dollar.” Last week, it was the eurodollar out front while China and Hong Kong were seemingly enjoying the relief. This week started with the eurodollar still primed, but now China is back to the center of the storm. The “dollar” system as it grew up was always fragmented (how could it be any other way, built in trading integration of banking systems all over the world) but it was only extreme pressure that illuminated the fault lines and why that matters.
As noted last week, you can understand somewhat why the PBOC would choose to put out and then actively enforce a financial target. Letting O/N SHIBOR, for example, skyrocket would not be helpful for maintaining orderly liquidity particularly between the stressed Asian “dollar” (bank balance sheets operating dark leverage and wholesale “dollars” in Asian markets) and internal renminbi liquidity. However, it isn’t at all clear that preventing that occurrence has gained much either. In other words, by pegging SHIBOR, the PBOC is generally and widely signaling its presence, which the “market” rightly interprets in much the same way as if SHIBOR were spiking anyway.
Maybe there is something gained by not having more direct indication of the scale of difficulty, but markets are to central banks in this directive as some whack-a-mole game. Holding something steady will indubitably produce stress (and indications of stress) somewhere else. That has been, in September, offshore yuan especially Hong Kong interbank.
Chinese stocks tumbled in Hong Kong, with the benchmark gauge heading for its steepest quarterly loss in four years, as a commodity rout deepened concern about the nation’s growth outlook…
“The economy is getting worse and there’s no sign of a bottom in sight,” said Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong. “Resource companies are hit hard by the slowdown as shown in the industrial profit data this week. The outlook for the stock market doesn’t look so promising in the next quarter.”
Commodity prices are the “dollar” and that balance sheet format is transmitted in any number of ways. You have the open “dollar” pressure of copper and crude, in particular, which are important hard collateral members of offshore yuan liquidity arrangements. So it is not surprising where any sharp drop in copper or crude might trigger margin calls in yuan, producing:
Overnight CNH HIBOR spiked to just about 9% from less than 4% in just one day – “dollar” reverberations. Without any onshore recourse driven by both the PBOC’s obvious restriction in the SHIBOR markets and continued tension with eurodollars showing up via the various moves in the CNY/USD cross, Hong Kong is a powder keg where all the world’s liquidity stress seems to be converging.
Crude oil prices today are bid (again, more at the front than the back) but copper remains depressed, mostly unchanged to this point in trading at yesterday’s multi-year lows. Gold also remains above $1,120.00.
The action, then, in Hong Kong renminbi seems very much like margin calls (and collateral) based on the eurodollar disruption of late – perhaps amplified (I would argue more than “perhaps”) by the PBOC that is still having great difficulty in managing its internal/external nexus. Global liquidations continue, then, once more pressing the scale of financial imbalance that obviously remains even after August 24-26. Even in yuan, that is a specific outbreak of the larger and globally general decline in the eurodollar function undoubtedly predicated not on what the Fed might or might not do but rather the darkening global economic outlook of the commodity “dollar.” These liquidity outlets are simply where all that comes together most distinctly.