The CrossBorder Capital Blog

The Asian Liquidity cycle remains in an upswing. Investment prospects in 2018 look bullish because of three factors – persistent Chinese monetary easing, monetized capital inflows from the US dollar and a significant change in Japanese monetary policy from liquidity-management to implicit Yen targeting. We have been Asian bulls throughout 2017, having sensed that the regional liquidity cycle had bottomed in 2016 and was in the early stages of recovery. Two factors to look out for are the growing importance of the Chinese Yuan as a transaction currency (it will ultimately displace the US dollar) and the economic impetus coming from China’s vast geo-political vision – the Belt and Road Initiative – as it stretches into Central Asia. Vietnam and Kazakhstan are consequently economies to watch in 2018.

Nervy investors are looking in the wrong place. It is reversing cross-border flows and not reversing Central Bank QE that poses the major risk for 2018. Overall, this year will see positive gains in both Global Liquidity and Central Bank money, but at much reduced rates when compared to 2017. China, which is entering the New Year with faster liquidity growth and more policy impetus that many recognise, is critical to prospects. On paper, we expect less US dollar weakness this year than last, but the dollar could be the key test for investors. A more rapid exit of US$3 trillion of foreign flows from the US, is easily a bigger threat that the slated more gradual withdrawal of US$1-2 trillion of QE, and paralleling events in 1987, it could trigger a second-half sell-off. Whatever, the alternative currency to watch is the Chinese Yuan, which has the potential to grab a large share of the US dollar reserve currency market. In this light, gold may also be a winner, despite reverse QE policie...