Currency traders across Asia invoked the spectre of the 2008 financial crisis on Thursday as acute corporate balance-sheet stress, cash repatriation by global investors, disruption to trade and hidden losses by imploding hedge funds led to a rush on the dollar.
In a signal that forex dealing rooms said was particularly ominous for the coming days, the closely watched dollar-yen cross currency basis — the cost of borrowing dollars for other currencies in foreign-exchange swap markets, has now hit levels not seen since the global financial crisis.
In a series of collapses that stunned dealing rooms and prompted speculation of direct intervention by, among others, the Reserve Bank of Australia, the Australian dollar plunged to an 18-year low that put the value of one Aussie dollar at $0.57 — with the currency falling 2.5 cents in the space of just one hour.
Philip Lowe, RBA governor, told reporters on Thursday the bank was prepared to intervene to stabilise FX markets but had not judged the liquidity problem severe enough to warrant doing so now.
As the dollar squeeze rolled into other markets, the Indian rupee declined as much as 1.1 per cent to 75.0562 per dollar — an all-time low and weaker than the key 75 line for the first time.
“We are seeing disorderly movers and forced selling as investors either liquidate positions or seek safety in US dollars,” said Claudio Piron, head of Asia rates and currency strategy at Bank of America Securities in Singapore. “That said, Asian FX markets are finding some support as central banks fulfil their role in stabilising markets.”
In other regional markets, South Korea’s Won was among the hardest hit, as the scramble for the dollar took it to a 10-year low. Hwang Se-woon, a researcher at Korea Capital Market Institute, said the plunging currency exacerbated the economic threat to big South Korean companies such as airlines, which are teetering on the edge of bankruptcy.
The coronavirus-driven rush for dollars accelerated over the past the 24 hours as the co-ordinated actions of the US Federal Reserve and other central banks to supply dollar liquidity earlier in the week wore off, said analysts.
Yujiro Goto, chief FX strategist at Nomura in Tokyo, said while it was good that the Fed and other central banks were providing dollar liquidity, the rush to the dollar was not coming from primary dealers and big banks but distressed companies and hedge funds that needed the currency quickly.
Next week, he estimated, the situation would calm down as more dollars were provided by the Bank of Japan and European Central Bank. But until then, high volatility could be expected.
“Last week, I thought the yen would test ¥105 [versus the dollar] before it tests ¥110. This week, I wouldn’t be surprised if it tests ¥110 before ¥105,” said Mr Goto.
In response to those uncertainties, forex rates across Asia fell on Thursday, with both emerging market currencies and the yen tumbling. “It has been pretty much an across the board rout,” said Khoon Goh, head of Asia research with ANZ in Singapore. “Every single currency has been sold, and none has been spared.”
Strategists at Maybank said markets were beginning to trade on an expected spike in coronavirus cases in Indonesia, citing a “very powerful cocktail” of dollar hoarding by companies and a liquidity crunch pushing the rupiah lower.
Behind the currency moves, analysts said, was how the coronavirus spread has affected industrial supply chains throughout Asia and especially in emerging markets.
Payment disruption along those chains, which were mostly financed in dollars, led to worries that even if central banks did offer dollar liquidity, it might not reach the critical non-bank intermediaries that handled financing, said Udith Sikand of Gavekal Research.
He added that because no emerging market central banks could access dollars directly from the Fed, companies and institutions were incentivised to hoard dollars, which weakened their national currencies.
Direct funding routes between the Fed and emerging markets that were opened as emergency measures in 2008, added Mr Sikand, were unlikely to be repeated by the current “America first” administration in Washington.
With additional reporting by John Reed in Bangkok, Stefania Palma in Singapore,Jamie Smyth in Sydney and Song Jung-a in Seoul