Central Banks Move To Ease Credit Crunch

Source : The Business Times, August 11, 2007

Asian currencies and carry trades hurt as liquidity fears escalate

SINGAPORE) Asian central banks acted swiftly yesterday to calm renewed fears of a liquidity crunch in the financial markets, after both Asian favourites and the high-yielding currency duo Down Under came under heavy selling pressure.

As the jitters escalated overnight, the Bank of Japan was reportedly obliged to pump an extra one trillion yen (S$12.9 billion), or about US$8.5 billion worth, of funds into the Tokyo money market yesterday - lent until Monday - while the Reserve Bank of Australia supplied up to A$5 billion (S$6.4 billion) in extra liquidity, according to a Reuters report.

Other regional central banks were also quick to offer reassurances on both the liquidity and currency fronts, after Asian currencies tumbled nervously in response to another rush to close out speculative or risky trades - with central banks in Indonesia, Malaysia, the Philippines and Taiwan widely cited as US dollar sellers against their falling currencies.

Locally, the Monetary Authority of Singapore also made it clear that it would act against any liquidity bottlenecks, if necessary.

That, however, could not stop the Singapore dollar from sliding in tandem with its Asian neighbours - lifting the US dollar to a one-week high of S$1.5238.

This despite cheery National Day news that local growth had been revised higher to 7-8 per cent for 2007 (from 5-7 per cent before), or yesterday morning's revelation that Q2 GDP had grown an impressive 8.6 per cent year on year as well.

The painful fallout for Asian stocks and currencies yesterday followed more bad news out of both sides of the Atlantic on Thursday - which was serious enough to force both the European Central Bank (ECB) and the US Federal Reserve to inject unusually large amounts of liquidity into their respective money market systems.

UK-based currency research firm IDEAglobal reported that before the US session was over on Thursday, the Chicago Options Exchange's closely watched VIX measure of financial market volatility had surged to a four-year high of 26.9

Wire reports suggested that, as a result, the ECB was obliged to supply as much as 95 billion euros (S$197 billion) worth of overnight money market funds, and the Fed was said to have offered a larger than normal US$24 billion in US domestic money market operations.

But as this was just one-day money, traders also warned yesterday, short-term US dollars lent for 'tom-next' (another one-day loan of funds between next Monday to next Tuesday) were being offered only at 6 per cent or even higher by the time London had started trading yesterday - compared to the Fed's much lower reference rate of 5.25 per cent.

The ECB had to act for a second time in 24 hours, pumping more than 61 billion euros into the market.

Catalysing the renewed spike in financial market fears overnight was the news that French banking giant BNP Paribas had frozen redemptions on three funds valued at around 1.6 billion euros.

Thereafter, in US trading on Thursday, Wall Street's benchmark Dow Jones and S&P 500 indices each suffered a dreadful one-day loss of almost 3 per cent after a US investment bank acknowledged similar liquidity issues at another of its hedge funds, and already nervous traders were shaken by warning rumbles about two US home loan outfits too.

By the Asian close yesterday, jangled nerves had lifted the US dollar as much as 1.3 per cent higher to 45.75 Philippine pesos, while a 4 per cent slide in South Korea's Kospi stock index had boosted the greenback by 0.8 per cent to 931.8 Korean won - brushing aside an unexpected rate hike by the Bank of Korea just a day earlier.

Elsewhere in Asia, the greenback also finished the session between 0.4 and 0.6 per cent better off at S$1.5212, 9,340 Indonesian rupiah, 34.08 Thai baht and 3.4770 Malaysian ringgit - though nervous unwinding of carry trade positions had also forced the greenback one per cent lower to 118.08 yen at the same time.

Indeed, the worst 'bloodshed' yesterday was suffered by the high-yielding currencies Down Under. At their worst levels yesterday, the Australian and New Zealand currencies had each tumbled at least one US cent, 1.5 yen, and almost 1.5 Sing cents from the opening bell - before cutting back some losses.

In yen terms, however, this still left the Australian and New Zealand units a painful 2.4 and 3.3 per cent worse off compared to their Asian closes just two days earlier on Tuesday - at 99.85 yen and 87.96 yen respectively. In Singapore terms, this also left them 1.5 and 1.7 per cent weaker - at S$1.2883 and S$1.1331 respectively.

Looking ahead, UK investment bank Barclays Capital warned against attempting to buy the two on dips just yet, explaining that both the ECB and the Fed may well need to do more to stabilise short-term money markets, and this would impact currency prices too.

'For instance, part of the reason for the move lower in the euro yesterday was probably investors swapping borrowed euro funds into dollars, as the ECB had injected far more liquidity into the euro money market than the Fed did in the US dollar market.'