February 9, 2018 / 9:18 AM / 11 days ago

BREAKINGVIEWS-Asian markets are vulnerable to dollar's revenge

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Pete Sweeney

HONG KONG, Feb 9 (Reuters Breakingviews) - Asian markets look vulnerable to a dollar rally. The sharp slump in New York stocks has prompted a regional selloff. A controlled burn could be healthy but speculative long positions - in particular in China - may have to unwind quickly. The risk is that investors in Asia rush back into dollar safety, given how many greenbacks local companies have borrowed. That would hurt the borrowers and complicate wider economic performance.

The S&P 500 has lost over 10 percent from its peak in late January. Still, global asset prices been in a lockstep rally for years; at some point investors were bound to take money off the table. Low levels of unemployment in the United States and worries about inflation there provided an excuse, and Asian investors have followed.

Drama has ensued. In China, the benchmark CSI300 index has lost 10 percent in one week, and there may be more to come. A Bank of America Merrill Lynch analysis shows that leverage positions in mainland stock markets were 23 percent of total market cap at the end of 2017, higher than levels seen before the crash of 2015. Unwinding such positions could see bourses fall further.

Debt could prove a bigger long-term headache. Low interest rates have encouraged Asian firms to borrow greenbacks instead of their own currencies. Bank for International Settlements data shows dollar-denominated credit to emerging Asia and the Pacific borrowers hit $1.3 trillion in the third quarter of 2017. Asian dollar bond issuance jumped 46 percent in 2017 to over $370 billion, according to Thomson Reuters data.

The recent anxiety has rekindled interest in safe haven currencies, pushing the dollar index up 1 percent in one week. That is minor, but a bigger rally could increase Asia’s debt service costs, prompting a regional hedging move back into greenbacks. That would complicate monetary policies and encourage evacuation from local currencies like the Thai baht and the Chinese yuan. Mainland firms rushing to pay down their dollar debt as the American currency rallied in 2014 sucked $1 trillion from hard currency reserves before capital controls were imposed. A share correction is nothing to fear, but a resurgent dollar could really scramble things.

On Twitter twitter.com/petesweeneypro

CONTEXT NEWS

- The MSCI Asia Pacific Index has fallen nearly 7 percent over the last five trading days as regional stock exchanges sold off following a slump in U.S. markets. The S&P 500 Index has declined over 10 percent in volatile trade since closing at a record high on Jan. 26.

- The index that tracks the dollar versus six currencies has gained over 1 percent this week to touch 90. It has fallen around 10 percent over the last 12 months.

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Editing by Una Galani and Katrina Hamlin

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