Hong Kong’s central bank moves to curb rising dollar

Bloomberg

Mon, Oct 22, 2012 - Page 14

Hong Kong’s de facto central bank stepped in for the first time since 2009 to prevent the city’s currency from rising against the US dollar after it touched the upper limit of a range that triggers an intervention.

The Hong Kong Monetary Authority (HKMA) said it bought US$603 million at HK$7.75 per dollar, which is the so-called strong side of the permitted convertibility range of HK$7.75 to HK$7.85 that obligates intervention. The move, announced in an emailed statement on Saturday, was confirmed by spokeswoman Rhonda Lam (林耘) who said the HKMA acted during New York trading hours.

“Funds continue to flow into Hong Kong given the monetary easing in the US and Europe,” said Kenix Lai (賴春梅), a currency analyst at Bank of East Asia Ltd in Hong Kong. “That’s evident by the rising stock market and property prices. I expect HKMA will still have to intervene in the near term as capital inflows continue.”

Policy makers from around the world have bemoaned the economic threat of stronger exchange rates from the US Federal Reserve’s monetary easing. At IMF meetings in Tokyo this month, Brazil’s Finance Minister Guido Mantega vowed to shield his country from the “selfish” monetary policies of some developed nations, while Philippine central bank Governor Amando Tetangco said the Fed was causing “challenges to monetary policy in emerging markets.”

The Fed initiated a third phase of so-called quantitative easing on Sept. 13, purchasing US$40 billion of mortgage-backed securities per month, and said this will continue until the outlook for jobs improves “substantially.”

The European Central Bank (ECB) and Bank of Japan (BOJ) have also added to stimulus. The ECB pledged last month to buy the bonds of governments that agree to austerity conditions while the BOJ boosted its asset-purchase fund by YEN10 trillion (US$126 billion) and abandoned a minimum yield for the bonds it purchases.

“The recent increase in demand for the local currency is related to a less strained European market, weakness in the US dollar and declining US interest rates, which have prompted capital inflows into currency and equity markets in the region,” the HKMA said.

“Upward pressures have similarly been observed in other Asian currencies,” it said.

Emerging-market equity funds tracked by EPFR Global Research recorded their sixth straight week of inflows for the week ending Oct. 17, bringing inflows to more than US$21 billion so far this year, according to a statement from the company. Commitments to China equity funds reached a seven-week high, with flows attributable to domestically-domiciled funds at the highest level in more than four months, it said.

The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s most-active currencies, rose 0.1 percent in the week ending Oct. 19 and touched 117.87 on Oct. 18, the highest level since February. The Hong Kong dollar gained 0.02 percent in the week to close at HK$7.7503 per US dollar.

The rally in the Chinese currency, which touched a 19-year high of 6.2446 per dollar on Oct. 18, has spurred demand for the Hong Kong dollar as investors bet the city’s economy and stock market will benefit from a growth rebound in China.

The currency gains “reflect the shifting investment sentiment toward the Chinese economy,” Andy Ji, a Singapore-based foreign-exchange strategist at Commonwealth Bank of Australia, said in emailed comments yesterday.

Data from the People’s Bank of China on Oct. 19 indicate capital inflows into the nation resumed last month after outflows in the previous two months. China’s financial institutions bought a net 130.7 billion yuan (US$21 billion) of foreign currency last month, according to the central bank’s report on yuan positions accumulated from foreign-exchange purchases.

That was the second-biggest monthly net purchase this year, data compiled by Bloomberg show.

“Given the proximity of Hong Kong to the mainland,” the recent strength in the onshore spot yuan rate has supported the Hong Kong dollar, Ji said.

Pressure on the city’s currency will probably remain, triggering more intervention, he said.

China’s economy expanded 7.4 percent from a year earlier in the third quarter, the government said Thursday. While that was the weakest pace in more than three years, industrial production, retail sales and fixed-asset investment all accelerated last month, signaling growth may be rebounding after a seven-quarter slowdown.

“As the Chinese economy is likely to have bottomed, investors want to position for the rebound and Chinese stock market valuations are cheap,” said Chris Leung, a Hong Kong- based senior economist at DBS Bank Ltd “Funds from Europe and the US are flowing into Hong Kong as well as for buying China- related stocks.”

China’s benchmark Shanghai Composite Index of stocks rose 1.1 percent in the week ending Oct. 19, the third week of gains and the longest winning stretch since April.