Salad Days

Remember the Taper Tantrum, Asia?

Indonesia and Malaysia are already facing a significant dollar squeeze.

A generation of traders will probably see something on Wednesday that they're yet to witness in their careers: a second Fed rate increase just three months after the first.

How will it play out in Asia? Tighter monetary conditions in the U.S. usually reach the export-driven region as a dollar squeeze, which pushes up the cost of working capital for supply chains.

Calm Before the Storm

Foreign ownership of Indonesian debt is rising, just as it was before the taper scare

Source: Bloomberg

*Normalized to 100 at the start of each year.

One way to estimate this shortage is to calculate what it costs lenders in the region to borrow in their home currencies and convert the proceeds into dollars versus the interest they pay on borrowing the greenback outright in the interbank market.

The technical name for the difference between the two rates is cross-currency basis swap spread. Before the 2008 financial crisis, the spread was practically non-existent, because lenders could easily earn risk-free profits by playing any difference in dollar interest rates in foreign-exchange and money markets. All they needed to do was to borrow.

That changed with the rescue of Bear Stearns & Co. in March 2008. Since then, the basis swap has become what the Bank for International Settlements calls a relatively clean measure of "the price of balance-sheet capacity" of global banking. The more deeply negative the spread, the less able or inclined lenders are to leverage their balance sheets even for assured gains.

The good news is that the fear gauge isn't showing any heightening of risk aversion even as the Fed turns more hawkish. The worldwide dollar shortage, while still at elevated levels, isn't getting any worse.

Flashing Amber

Cross-currency basis swap spreads don't show a dollar squeeze in global banking; but the risk is still elevated

Source: Bloomberg

*Average of AUD, CAD, CHF, DKK, EUR, JPY, NOK, NZD, SEK against USD.

Capital outflows from China are no longer as big a worry for global investors as they were a year ago. In India, stock markets are flirting with record-high prices after a surprisingly strong mandate for the ruling party in a crucial state election.

Not all Asian countries are assured of a free pass, however. Suppose an Indonesian bank decided to raise dollars for three months by borrowing rupiah funds onshore, using them to buy the U.S. currency and then selling those in the forward market to repay the local-currency loan. The cost of this entire operation today is almost 2.5 percent, compared with a three-month dollar Libor of 1.1 percent.

The dollar squeeze is only slightly less intense in Malaysia. The ringgit is stable, thanks to the central bank's crackdown on banks that speculate against the currency in offshore markets. But traders' anticipation of exchange-rate volatility is creeping higher.

A Different Kind of Tantrum

Banks in Indonesia are most at risk from a dollar squeeze as the Fed raises rates

Source: Bloomberg

*Lenders' costs of raising three-month dollar funding by borrowing locally in the interbank market, buying dollars in the spot market, and selling those dollars three-month forward in the foreign-exchange market.

Investors in Asia aren't too perturbed.

Foreigners are increasing their exposure to Indonesian government bonds. But then, that's what they were doing right up to the moment when former Fed Chairman Ben Bernanke first hinted at an end to quantitative easing in May 2013, and everybody headed for the exit doors.

Even if traders don't remember the last time the Fed raised rates twice in three months, they're unlikely to have forgotten the taper tantrum.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andy Mukherjee in Singapore at

    To contact the editor responsible for this story:
    Katrina Nicholas at

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