Asia’s dollar drain is just the beginning – Deutsche Bank

The relative resilience of Asia to USD liquidity stress in recent years has been puzzling, notes Research Team at Deutsche Bank.

Key Quotes

“While cross currency basis has widened significantly in G3 markets since 2014, Asian basis has not followed, which is very different from the tight correlation in global USD liquidity observed during the 2008 GFC and 2011 euro sovereign crisis. This divergence can be rationalized by the fact that the supply of USD to Asia has generally remained plentiful till now, but these sources of USD could be at risk in the new post-election regime.”

“We are starting to see signs of pressure on USD funding in select currency markets, and there are a number of idiosyncratic drivers of relative local currency and USD liquidity to be aware of. Another risk factor is potential repatriation of US corporate earnings should there be a reform to the US tax code. However, should central banks choose to pull back  either on account of reserves adequacy or to allow currencies to adjust for competitiveness reasons  USD liquidity could have much further to tighten in Asia. Tighter relative USD liquidity will act as an additional bullish driver for USD/Asia.”