The contagion effect of Argentina is not serious. The event has been in the news for some time. Last night, the impact on Brazilian and Mexican financial markets was not significant.

There are some slight ripple effects on east Asia this morning. But such effects should be seen against the background that the weakness in the Japanese Yen in the past few weeks has already generated some uncertainties in the prospects for the exchange rates in the region.

The 1-year HKD forward premium rose from around 165 on Wednesday to around 280 this morning (but to put this in perspective, this means that 1-year HKD interest rates are now higher than those of the USD by 0.4 percentage points -- not a significant difference). The situation seems to be driven by speculative interest and trading appears to be thin (it's Christmas season anyway). The HKD spot exchange rate remains on the strong side of the peg (around 7.7985).

Argentina -- on the edge of devaluation

• Newest development on the Argentina turmoil once again sends shock waves to regions over the world in the last 2 days.
  
  
• The chaotic riot, worst over the past decade, stirred up concerns over the already looming debt payment problems, while the sudden resignation of president Fernando de la Rua last night pushed the situation further towards the edge.
  
  
• Increasing expectations and concerns over possible devaluation or re-pegging of the Peso is noted in the markets globally, as downward pressure continues to build up for the ailing currency and the ability for the authority to use their reserves to maintain the peg is in question given its structural financial problems.
  
  
• Moody's also lowered Argentina's bond ratings to Ca from Caa3, reflecting this deterioration in economic, financial and social conditions.

Hong Kong -- feels the shock wave ripples

• Being also pegged to the USD, HKD also suffered pressure upon speculation of possible devaluation. This is reflected from the rapid rise in HKD forwards, shooting up from 163-178 to 220-240 yesterday upon the riot, and further towards 290-310 this morning upon the resignation of Fernando de la Rua. The markets expect that the HKD forwards will likely reach 350 level over the next few days. This level, however, is far from alarming, as it is still below the previous peak of 450+ earlier in April 2001and the extreme levels during the Asian crisis.
  
  
• The 2.7% fall in Heng Seng Index upon opening this morning is also well anticipated, partly also due to the fall in the US stock markets overnight. Together with the soothing words of comfort from Anthony Leung yesterday, ripples from Argentina seems to have limited psychological impact on the Hong Kong markets' sentiment so far.
  
  
• Unlike the times during the Asian crisis, the Argentinean debt crisis has been well anticipated and priced-in. Any unrest within the markets should therefore only be short term, given the Hong Kong authority's ample reserves and commitment in defending the peg.

Other Latin America Countries -- seeing money inflow so far

• Major Latin American currencies like MXN, BRL and CLP have been on a bullish trend since October 2001, appreciating roughly 6%, 20% and 8.3% respectively. This paints a positive picture so far, indicating the global confidence on and inflow of investment into these countries amid looming crisis in Argentina.
  
  
• Therefore, yesterday's slight fall in regional stock markets (-2.8% in Brazil, <1% for the other 2) have been comparably minimal, while the average 2-3% weakening in currencies can be seen as only part of a temporary correction, giving back part of their previous gains.

Other Asian Countries -- shocks from JPY weakness more than from Argentina

• Responses from the Northeast Asia countries have been negative over the last few days. JPY has weakened roughly another 100bps to 129.50 overnight, asserting pressure also on KRW & TWD in the same region due to their similar export and industry structure. USD/KRW surged from 1300.50 to 1313.00, while USD/TWD rise towards 35.00 level. This downtrend for the JPY, however, has been ongoing since mid September, and is primarily based upon the negative outlook of the ailing Japanese economy and the decision by the authority to ease monetary policy further. As most of the contagion effect from Argentina should already have been well anticipated and priced-in, regional focus for the coming months should continue to lie upon both the performance of Japanese economy, and the outlook of China after joining the WTO.
  
  
• As for Southeast Asia, regional currencies like SGD and THB also turned weak upon the influence from JPY and Argentina. However, compared to Northeast Asia, the crisis' contagion effect seems even milder, as USD/SGD rose only 0.035% and even less for USD/THB. Regional equity markets also seem relatively calm as only slight falls are recorded by noon.