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Conclusion: The concurrent events and associated risks of King Dollar strength continue to be showcased across Asian financial markets and economic data.



Inclusive of today’s global short squeeze, Asian equities had another soft week (11/21-11/28), closing down nearly a full percent on a median basis. The spread between the best performer (Thailand; +2%) and the worst performer (Australia; -2.5%) was a healthy 450bps.

Asian currency markets were generally flat on the week, closing down -0.1% on a median basis. Gains were led by the Queen’s currencies (Aussie and Kiwi dollars), which closed up +1.2% and +1.3% wk/wk vs. the USD, respectively. The Japanese yen closed down -1.4% wk/wk vs. the USD and JPY weakness slightly lead today’s rally in global beta.

Asian sovereign debt markets were generally weaker on the week, as a combination of ratings threats (Japan), better-than-expected economic data (Hong Kong) and illiquidity (Asian Tigers) drove up yields on various issues. Indonesia saw its 10yr yield back up +51bps wk/wk; Japan and Hong Kong also saw double-digit gains (+10bps and +12bps, respectively). Australia’s bond market continues to price in additional monetary easing: 2yr yield down -12bps wk/wk; China’s swaps market continues to price in the commencement of easing in the mainland: 1yr O/S swaps rates down -13bps wk/wk.

Asian 5yr CDS had a generally mixed week, highlighted by the +15bps widening of Japanese swaps on the rumors of an eventual S&P downgrade.


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If you didn’t get a chance to review our 11/22 research note titled “Asia Isn’t Buying Into Santa Claus”, please email us for copies. The analysis below picks up where that piece left off.

Growth Slowing:

  • HSBC’s preliminary manufacturing PMI for China (85-90% of responses) ticked down to 48 in Nov  vs. a final reading of 51 in the month prior. The final HSBC and official CFLP readings are due out this Wednesday evening and could shock global macro markets if they are in-line with the aforementioned sneak peek.
  • Japanese small business confidence ticked down in Nov to 45.8 vs. 46.4 prior.
  • The Reserve Bank of India cut its domestic growth forecast for the current fiscal year to +7.6% YoY from +8% prior. While it’s easy to say they were a step closer to easing as a result, India’s domestic inflation situation is set to remain among the least accommodative in the world over the next 3-6 months based on our models and imprudent monetary policy (i.e. implementing QE with WPI > +9.5%). “Inflation is a regressive tax that hurts the poor the most in a country like India where food is a large share in the consumption basket,” per RBI Governor Duvvuri Subbarao. Moreover, the FX depreciation detailed below suggests he might be forced to hike rates again and risk slowing Indian economic growth incrementally from here.
  • On the heels of slowing commercial sales and industrial production growth (to +1.8% YoY and +1.4%, respectively – the latter at a 26-month low), Taiwan’s statistics bureau cut its 2011 and 2012 growth forecasts to +4.51% and +4.19% (from prior estimates of +4.56% and +4.38%, respectively).
  • At face value, Singapore’s Oct industrial production growth looked quite healthy (+24.4% YoY vs. +11.3% prior). Peeling back the curtain, however, we see that the pickup in growth was entirely driven by pharmaceutical output (+117.5% YoY), while electronics production (iPad and Kindle parts, etc.) slumped -20% YoY.
  • Though largely a function of nationwide flooding which shuttered factories and caused capacity utilization to tick down to an all-time low of 46.4% in Oct, Thailand’s manufacturing production growth tanked in Oct to -35.8% YoY vs. -0.3% prior. Hard disk drive production (of which Thailand is the world’s #1 supplier) fell -52.4% YoY and electronics parts fell -45.5%. Thailand’s Office of Industrial Economics added that it may take 1-2 months before plants can resume normal operations after the flood waters recede.

Sticky Stagflation:

  • The PBOC said in a statement last week that it will continue to implement “prudent” monetary policy. Sticky inflation that remains well above target continues to slow China’s monetary easing process, despite their pledge to promote “reasonable growth” in credit and money supply. While the PBOC will do what it can in the interim (last week it cut RRRs in Zhejiang and 20 rural credit cooperatives), we remain of the view that substantial monetary easing in China is 1-2 quarters out absent a strong deflationary shock (i.e. a dramatic, expedited breakout in King Dollar).
  • Chinese industrial profit growth slowed in October to +12.5% YoY, which was less than half the YTD run-rate of +27% (Jan-Sep). The impact(s) of slowing growth on top line trends, inflationary margin compression, and credit tightening continues to weigh on industrial activity in China.
  • Hong Kong CPI held at +5.8% YoY in Oct.

King Dollar:

  • The Chinese yuan continues to gradually weaken, closing down -0.3% wk/wk vs. the USD and is now trading at a ~30bps discount to 1yr non-deliverable forward rates. Expectations of yuan weakness continues to be a headwind for the dim sum bond market as investors demand more interest rate return to offset less FX appreciation; average yields rose +32bps in the month-to-date and +197bps over the last six months. We saw this play out via growth in offshore yuan deposits in Hong Kong, which slowed in 3Q to +69.6 billion QoQ vs. +102.2B in 2Q.
  • Japanese CPI slowed in Oct to -0.2% YoY from 0.0% prior; core CPI slowed to a -1% YoY from -0.4% prior. This easing of inflation, particularly on the core side, is one more supportive data point for additional easing out of the Bank of Japan – which just recently shifted its tone on the margin towards supporting incremental accommodation. Per BOJ Governor Masaaki Shirakawa: “In the current time of high uncertainty regarding the future prospects of overseas economies, due attention is necessary to the risk that the yen’s appreciation will dampen future growth… This is the very reason that the bank has embarked on monetary easing measures twice since this summer.” Speaking at an anti-strong yen groupthink convention in Nagoya today, this the third time over the last few weeks the governor has spoken out regarding the threat Europe’s sovereign debt crisis poses to the Japanese economy. His comments were delivered to us this morning concurrently with data that shows the BOJ capital adequacy ratio hitting a 32yr-low of 7.23% after suffering a $1.2 billion loss from its asset-purchase program in the six months through September.
  • Last week, India’s rupee touched an all-time low of 52.375 per USD, prompting the Reserve Bank of India to pledge managing the associated FX volatility via intervention in the spot market. On the flip side, R. Gopalan, secretary of economic affairs at the finance ministry, suggested last week that the RBI’s ability to aggressively stem the rupee’s slide is limited because of the tightness of interbank liquidity and the likelihood that USD-selling would lead to an even higher call-money rate (30-day average of 8.49% is a near 3yr-high). Another sign of interbank illiquidity in India: banks borrowed an average of 1.13 trillion rupees per day from the RBI’s overnight lending facility over the last week – the highest rolling 7-day average since January. The rupee weakness is being fueled by a foreign investors dumping of Indian assets (bond holdings down -$213 million wk/wk; equity holdings down -$1.8 billion since July) and a near closure of India’s dollar debt and international syndicated loan markets (the latter down -87% MoM in Oct in terms of issuance). In recent weeks, the RBI and central gov’t have implemented new rules designed to spur dollar inflows, including increasing the cap on foreign investor rupee debt ownership by a total of +$10  billion, loosening rules for overseas corporate borrowing, and removing a $100 million limit on corporate FX sales via currency swaps . King Dollar manifests itself in many ways across the Global Macro landscape.
  • Singapore CPI slowed in Oct to +5.4% YoY vs. +5.5% prior – inching the Monetary Authority of Singapore a mere 10bps closer to another currency band compression.

Eurocrat Bazooka:

  • Jesse Wang, executive vice president of China Investment Corp, the nation’s sovereign wealth fund, recent comments affirm our conviction in the view that China will not be a source of dumb, unlimited capital to finance the Eurozone bailout, but rather a source of smart money looking for attractive investment opportunities in distressed real assets: “The fund wouldn’t be the main channel if China helps tackle the sovereign debt crisis... However, if during such a process there are good investment opportunities in Europe and if CIC’s investment helped the destination company or country to recover and developed the economy, that would be indirect support.” Commerce Minister Chen Deming shared those views in his recent remarks: “While China has always been supportive of Europe’s rescue efforts, these will mainly depend on the euro zone itself… China will definitely be a part of any help offered by the global community… We are willing to further reform and further open our market, but other economies must be more open to us in return.”
  • Analyzing commentary out of China and Australia, it appears the global community is growing increasingly tired of Europe’s inaction on adequately addressing its sovereign debt crisis. Per China’s Commerce Minister Chen Deming: “So far we have yet to see a step towards success… We have only seen a reshuffling of leaders in some European countries.” Per Australian Treasurer Wayne Swan: “EU politicians have been frustratingly slow in tackling the region’s sovereign-debt crisis that has dragged on global economic growth and cut Australian government revenue, causing asset prices to fall and households to spend less… Europe needs to understand that financial markets don’t work on political timelines, and they are already a long way behind the curve. The global economy has already paid a very high price for the failure of Europe to get its house in order.”
  • Japanese asset managers are blowing out of European sovereign debt (including German and French paper) in the year-to-date, opting for U.K. gilts instead – +$19.1 billion in direct purchases and another +$37.4 billion channeled through the Cayman Islands.


  • Bucking the recent trend of slowing export growth domestically and across Asia, Hong Kong saw an acceleration in export growth in Oct to +11.5% YoY vs. -3% prior.
  • Philippines real GDP growth accelerated in 3Q11 to +3.2% YoY – after a downward revision to the 2Q report to +3.1% from +3.4%. Growth still slowed outright on a QoQ basis, which may add to pressure on Bangko Sentral ng Pilipinas to ease monetary policy later this week.


  • A read-through on the weakness of China’s property market (absent more-reliable official price data): 80% of construction companies said developers were behind on payments, per a recent Credit Suisse survey.
  • Standard & Poor’s said the leadership in Japan, led by recently-elected Prime Minister Yoshihiko Noda, hasn’t made enough progress in tackling the nation’s public debt burden. “Japan’s finances are getting worse and worse every day, every second,” according to Takahira Ogawa, director of sovereign ratings at S&P in Singapore. “[Consensus] may be right in saying that we’re closer to a downgrade. But the deterioration has been gradual so far, and it’s not like we’re going to move today.” Be it S&P, Fitch, or Moody’s, which all have Japan’s long-term, local currency sovereign debt rated at some form of AA-, the next downgrade of Japan is likely to trigger capital raises across Japan’s banking system to the tune of $75-81 billion based on Basel II requirements and Hedgeye calculations. Perhaps that’s yet another reason why the Topix Bank Index is trading a mere +1.6% off its 20yr-low (established on Friday).

Darius Dale








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