2014-10-08

What's A Little U.S. Dollar Rally Among Friends?

Too-Big-to-Fail Developers Lead Dollar Bond Gains: China Credit
China’s developers are the nation’s best-performing dollar bonds this quarter, even as a real-estate bubble starts to deflate. Investors say higher yields and government support will sustain returns.

Thus far there has been no direct support for the industry, with the outcome of the current mortgage easing still undetermined. Direct support for the bonds would be another matter.

FTAlphaville: Asian corporations increase their US dollar shorts
Residents of emerging markets owe hundreds of billions more dollars (and euros) than previously thought, because they have sold bonds offshore that don’t get counted in national statistics. An IMF study released at the beginning of the year measured the size of the discrepancy:

This borrowing creates a currency mismatch. As long as the dollar (or euro) doesn’t appreciate too quickly against the borrowers’ local currencies, the debts can be easily serviced. The danger is that these large short positions could cause a squeeze and create a desperate search for scarce dollars — exactly what happened in 2008.

...More than half of these bonds (both investment-grade and high-yield) were issued by companies based in China, Hong Kong, Macau, or Taiwan.
Click through for charts.

One thing I haven't seen yet are the complaints from Chinese exporters about the strong yuan, which has rallied along with the U.S. dollar versus the euro, yen and emerging market currencies. If the dollar pushed on to new highs, there will be pain and the hoarding of U.S. dollars may begin again, forcing the offshore yuan lower and setting off the dollar drain from China's reserves once more.

Prior or relevant coverage: Falling Yuan Socks Debtors; Developers in the Crosshairs
The Informational Power of the Offshore Yuan Exchange Rate
PBOC can't buy a buck; talk of depleted reserves is not alarmist
China's dollar short position
Signs Point to Lower Yuan, But US Treasury Wants Appreciation
Chinese hoard dollars

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