The Reserve Bank of India was again spotted in the forex markets, as the rupee again nears its record low against the dollar. While India has myriad problems that add up to foreign exchange imbalances, there is pressure on the dollar as globally firms are finding them harder to come by.

That rising dollar has far-reaching implications across already-stressed markets and economies. In the face of slowing and contracting economic and trade growth, monetary instability is far beyond unwelcome.

Earlier this week I posited a China-connection with this dollar shortage. Not unlike European and Swiss banks during the housing bubble, it appears as if Chinese corporations have opened a huge short dollar position. That creates upward pressure on the dollar (and thus “devalues” exchange crosses) whenever the short position is threatened by the inability to refinance it. That was essentially the panic of 2008; short dollars in the interbank eurodollar market led to all sorts of problems, including a rapidly “rising” dollar.

In this kind of situation, it is not a “rising” dollar so much as an increase in the cost of its attainment by those that are in untenable positions. So when I see stories like that of China Rongsheng Heavy Industries, it looks not unlike that dollar funding pressure:

“On Friday, China Rongsheng Heavy Industries Group, China’s largest private shipbuilder, appealed for financial help from the government and big shareholders, after cutting its workforce and delaying payments to suppliers.

“Analysts said the company could be the biggest casualty of a local shipbuilding industry suffering from overcapacity and shrinking orders amid a global shipping downturn. New ship orders for Chinese builders fell by about half last year.” [emphasis added]

Here we have the nexus of both over-extended Chinese companies (likely in dollar terms as well) and vastly diminished global growth. If the lack of payment activity spreads to cross-border relationships, and it is likely it has or will, then that gets back to US dollar funding needs.

Against that demand for dollars, taper talk in the US has tightened supply. Some Asian banks and firms have in the years since the “Asian flu” attained solid dollar funding status, enough to shed the emerging market stigma and easily raise US dollar liabilities. According to the South China Morning Post, Asian G-3 bond issuance fell last month to the lowest funding level since November 2008 during the last panic.

Putting these pieces together: rising demand as trade and activity falls + reduced supply = rising dollar cost. That is an unwelcome development in China, India, Brazil and a lot of other “emerging”, supply chain places around the world.  Central banks are going to be busy, something they would rather avoid.

 

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