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Monday October 20, 2008 - 13:38:55 GMT
Black Swan Capital - www.blackswantrading.com

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Can you say Asian Financial Crisis Redo?

Key News
• The rate at which banks lend dollars to each other fell on Monday as dealers reported U.S. banks starting to lend rather than simply hoard cash, a sign central banks are gaining traction in their quest to unclog frozen money markets. (Reuters)
 US Economic Events (WSJ):
10:00a.m. Sep Conference Board Leading Indicators: Previous: -0.5%.

Quotable
“Paper money is faith-based, says Grant’s.  Then how much more so is credit, which is the promise to pay paper money?”

    Jim Grant

FX Trading – Can you say Asian Financial Crisis Redo?

Interesting!  It seems the chances for another Asian-style financial crisis lingers and is rising (we are already seeing it in S. Korea; chart below).  This is surprising since it appeared the entire region was well position to whether a downturn in the major economies—at least the view before the downturn morphed into an all out assault on all the ties that seem to bind the global financial system together.   

Oct 20 IHT/Reuters: Economic growth in China slowed to 9 percent in the third quarter of this year, the slowest pace in more than five years, as industrial production and construction slackened because of weak exports, a slumping real estate market and temporary restrictions imposed during the Olympics.

Our view—liquidity is draining out of China faster than expected:

• Pre-Olympics planning by Chinese factories before the global financial crisis, in a world where demand was still existent, now means front-end loading of inventory was much too big and will represent and additional drag on corporate profitability and cash flow.

• The real estate bubble is popping, which represents another major liquidity drag now that the stock bubble has popped.


And, as China goes, so goes the Aussie, and maybe the rest of the region.  This an excerpt from the current issue of The Economist:

“China’s growth is increasingly important for the region [Asia].  This month Australia’s Mr. Rudd rang the Chinese prime minister, Wen Jiabao, to ask about projections for China’s growth, and whether its strong demand for Australia’s minerals was likely to continue.  On getting and upbeat answer, Mr. Rudd concluded that China was now ‘critical for Australia’s continued economic performance.’  It is also the biggest trading partner for Japan and India.  But, according to the Asian Development Bank, 60% of Asia’s exports (not including Japan’s) still go to America, the European Union and Japan.  A decline of one percentage point In America’s growth rate, the bank calculates knocks 0.3 percentage points off Asia’s.  That may be optimistic.”

Questions:

1) Why Australia is about to slash rates again if Chinese demand remains firm?
2) How can Asia avoid a beg slump if dependence on the big three (US, Europe, and Japan) remains strong?
3) Does China message its growth rate numbers?

Guess:

1) China demand is fading fast.
2) Rising current account deficits (falling export numbers) across the region say Asia won’t avoid a big slump.
3) Chine lies consistently about its economic statistics, but the rest of the region will tell the story.

…and near-term, Asian currencies could surprise on the downside against the dollar and the Aussie has more to go…


What if all that hot money sitting in Chinese real estate, waiting for that one-off Chinese currency revaluation opportunity the economist’s told us is inevitable, finds the Chinese currency backing up instead of appreciating?  Just maybe that becomes another liquidity hit, at least near-term, for China.

 

 

 

 

US$ - Chinese yuan Daily:

(Chart unavailable in text format.)
 

AUDUSD Daily:
 

(Chart unavailable in text format.)


US$ - S. Korean won:  A crisis is already playing out there…

(Chart unavailable in text format.) 


Jack Crooks
Black Swan Capital LLC

 

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