Real Rates in Asian & Eastern European Markets: Monthly Chart Update 10/3/11
Here are the updated charts of real interbank rates in Asian & Eastern European markets:
Asian real rates are generally exhibiting bearish dynamics. Chinese real rates are negative and pointing down, Indonesian real rates are pointed downwards and South Korean real rates have remained negative for some time (although they recently hiked). Indian real rates are negative but they are pointed upwards.
Likewise, Eastern European real rates exhibit bearish dynamics. Czech and Hungarian real rates are tentatively pointed higher (although Czech real rates are negative). Polish and Russian real rates are negative and falling (as bearish as it comes).
Why does this concern me?
The emerging markets have been the outlet for western capital over the past two years. Since real rates in the west have been undesirably negative, we have sought to own deposits abroad. This has encouraged EM fractional-reserve institutions to lend, and has thus spurred ‘economic growth’. The implication has been generally favorable business conditions in EM countries (as all businessmen are – in a sense – ‘long things’ and ‘short money’). Now that real rates in Asia and Eastern Europe are broadly negative, the profit-motive that sent western capital abroad has gone.
Thus, a bearish prospect is now looming: the mass repatriation of western capital. If all of those trades are reversed at once, funding currencies could appreciate violently. Who loses in this scenario? Globally-focussed countries that are susceptible to capital repatriation: Switzerland & Japan?
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