Currency wars

As we discussed in the last episode of Keiser Report, Ben Bernanke had only last week in Japan addressed this issue of foreign exchange intervention, claiming that emerging markets (and the likes of Hong Kong) should NOT intervene for doing so will only make the US economy worse and, therefore, all economies worse. Currency Wars.

--- Stacy Herbert

Hong Kong Defends Its Currency Peg for First Time Since 2009

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 U.S. dollar after it touched the upper limit of a range that triggers an intervention.

Bloomberg,

21 October 2012

The Hong Kong Monetary Authority said it bought $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 e-mailed statement yesterday, was confirmed by spokeswoman Rhonda Lam who said the HKMA acted during New York trading hours.

“Funds continue to flow into Hong Kong given the monetary easing in the U.S. and Europe,” said Kenix Lai, 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 U.S. Federal Reserve’s monetary easing. At International Monetary Fund 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 $40 billion of mortgage-backed securities per month, and said this will continue until the outlook for jobs improves “substantially.”

Currency Demand

The European Central Bank and Bank of Japan 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 10 trillion yen ($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 U.S. dollar and declining U.S. 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. The HKMA last intervened in December 2009.

Hong Kong’s benchmark Hang Seng Index (HSI) of stocks has risen 7.5 percent since the Fed’s announcement and gained about 19 percent from this year’s low on June 4. Home prices have surpassed their October 1997 peak, according to Centaline Property Agency Ltd.

Capital Inflows

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 $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 won completed its best week of the month and the yuan had an 11th week of gains, the longest winning streak since March 2008. The Hong Kong dollar gained 0.02 percent in the week to close at HK$7.7503 per U.S. 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.

Investment Sentiment

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 e-mailed 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 ($21 billion) of foreign currency in September, 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.

Growth Rebound

China’s economy expanded 7.4 percent from a year earlier in the third quarter, the government said on Oct. 18. While that was the weakest pace in more than three years, industrial production, retail sales and fixed-asset investment all accelerated in September, 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 U.S. are flowing into Hong Kong as well as for buying China- related stocks.”

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

The HKMA will “remain closely vigilant of the market developments,” the authority said in its statement. The intervention means the banking system’s aggregate balance will expand to HK$153.3 billion ($19.8 billion) on Oct. 24, it said.

Capital Outflows

Hong Kong linked its exchange rate to the U.S. dollar in 1983 when negotiations between China and the U.K. over the city’s return to Chinese rule spurred capital outflows. In 2005, policy makers committed to limiting the currency’s decline to HK$7.85 per dollar and capping gains at HK$7.75.

When the Hong Kong dollar reaches the so-called strong end of the permitted trading range, the HKMA offers to buy U.S. dollars to prevent further appreciation under its currency board system.

Joseph Yam, the former Hong Kong monetary chief who helped introduce the peg and defended it against speculators during the Asian financial crisis, said in June the city should review its currency policy.

Hong Kong officials have said there are no plans to adjust the peg and HKMA Deputy Chief Executive Arthur Yuen told reporters on Oct. 19 the authority sees no need to change the arrangement.