Oh Ye Serpent, Thy Venom Doth Sting – CNY, MYR, PHP

In the first 3 weeks of 2014 and the end of the lunar year of the Snake, over 80% of the 162 currency pairs in the world have lost out against the USD.

Argentine Peso -6.38% (historic low)
Turkish Lira -5.83% (historic low)
Canadian Dollar -4.44% (4 year low)
South African Rand -3.93% (5 year low)
Russian Ruble -3.41%
Chilean Peso -3.11% (3 year low)
Mexican Peso -2.26%
South Korean Won -2.23%
Philippine Peso -2.13% (3 year low)
Swiss Franc -1.95%

Suddenly the USDJPY does not look too bad because there are over a dozen currencies depreciating much more than the JPY last year.

We are talking about AUD, SAR, IDR, TRL. The Snake bites in different places. Australia has the largest population of poisonous snakes in the world with Africa close behind whilst New Zealand and Ireland have virtually no snakes at all. Is it a coincidence that the NZD and EUR are better off for that ?

Asian currencies are comparatively subdued so far even with China cracking up very quickly and doubts are spreading like a wildfire in the investor community.

The shadow banking default probability is rising as PBOC continues to inject cash at record pace, extending their intervention to the small banks too. Manufacturing numbers disappointing like the one today adds to the fear of a hard landing.

It started with ICBC  refusing to bail out a trust product that they had distributed which has run into financing troubles. http://www.bloomberg.com/news/2014-01-17/icbc-won-t-bail-out-troubled-china-trust-product-official-says.html

Today’s headlines is causing an epileptic fit in the credit markets.

By Bloomberg News
     Jan. 23 (Bloomberg) — Some farmers’ financial cooperatives in Yancheng city in eastern Chinese province of Jiangsu have been unable to pay depositors since the beginning of this year, China National Radio reports, citing depositors.
• Xinhua also reported that some farmers’ financial cooperatives in Yancheng face funding abnormalities

Yet the USDCNY is holding ruddily to its historic lows, at 6.0522 after bouncing off its record low of 6.0393 on 14 Jan this year. This does not stand to reason, not especially if you consider that China’s credit default swaps are widening.

cny and china 5y cds

It would do us well to be cognizant of the state of the credit markets on their high degree of correlation to the foreign exchange rates and the foreign exchange rates amongst themselves.

Just take a look at the MYR and PHP. They look like a pair of heavenly twins and Malaysia is a touch more correlated to Chinese growth on their trade balance.


The saving grace is that we will not be seeing USD buying on regional central bank interventions anytime soon, because the currencies are weakening naturally which potentially gives room for USD selling instead.

Yet, we cannot ignore the looming fall out of the shadow banking crisis in the weeks ahead. In saying that, I do not advocate selling out of CNH into any other currency but the majors. Because if China goes, so does Asia and we can see the distress building up in the Asians (except India) of late, led by the KRW.

What a snaky year it has been as we get ready to embrace the wooden Horse next week in the lunar new year and the only wooden horse that comes to my mind is the Trojan one.