Warning: Beware of USD liquidity crunch

Find out from RBS how it will affect the Singapore dollar and other Asian currencies.

RBS noted:

As the global risk escalates, the odds of another global USD liquidity crunch are going up. This time, we believe the hot spots will be India, Indonesia and yes – China, specifically the offshore CNH.

Korea and Thailand would be much less affected than during the 2008 Lehman crisis. There has been a significant reduction in foreign capital dependency by Korea and Thailand in the aftermath of the Lehman crisis – whether in the form of USD-leveraged portfolio inflows or short-term foreign borrowing.

In contrast, this has gone up in the case of India and Indonesia while their current account positions deteriorated under the weight of strong domestic demand for imports and rising global commodity prices. The rapid drop in oil prices will not be an adequate counter-weight to the capital account pressures.

The typical outcome of a USD liquidity crunch would be a bear-inversion of FX forward/ NDF curves and a widening of cross currency swap basis – watch out for these risks in IDR, INR and the more open markets such as SGD, HKD and MYR.

Hence, we would rather switch out of long USD NDF curve trades to outright long USD positions. On an outright basis, we switch places for MYR and THB – the former from bullish to neutral and vice versa for the latter. Therefore, there is a case for going short MYR/ long THB.