With the rise in the USD, UST yields and LIBOR-OIS, it is key to know where most offshore dollar leverage lies. The top-left chart shows the big picture – worldwide, there is over $14 trillion of USD claims held outside of the US (BIS data). Most of these are counter-partied in developed-market countries such as Japan, but almost $2.5 trillion is held by weaker hands, in EM countries. In many of these countries, the mismatch between domestic-currency assets and foreign-currency liabilities is large. This means when we get rises in US yields – which tend to suck much-needed capital away from the country and make debt refinancing more expensive – as well as rises in the USD, which reduce the real value of assets relative to the real value of liabilities, this is a recipe for economic and market volatility. We have seen some of the weakest of the weak hands, such as Turkey and Argentina, affected most lately.

In the top-right chart we can see that apart from the offshore centres, such as in the Caribbean, Hong Kong and Singapore, China has one of the largest exposures to offshore USD. However, in the bottom-left chart, we can see that relative to GDP, China’s position is small. The countries with the largest offshore USD lending relative to GDP are Chile, Malaysia, Thailand and Turkey. Commodity exporters such as Chile and Malaysia can mitigate some of the currency mismatch, less so Thailand and Turkey. The final chart shows where the most offshore euro leverage lies.

(Click on image to enlarge.)

Charts showing dollar leverage

Source: Bloomberg, Macrobond and Variant Perception