Hong Kong Monetary Authority Intervene in Currency Markets

Hong Kong’s Monetary Authority (HKMA) has intervened in the currency markets for the third time in less than a week, selling a total of HK$6.63bn (US$855m) to halt the rise of the Hong Kong dollar against the US dollar.

Hong Kong currency pushes up against the upper limits of its trading band of US$1 to HK$7.75

The mechanisms that govern Hong Kong’s currency board, by which the Hong Kong dollar’s exchange rate is linked to the US dollar, mean that the central bank must buy US dollars when the Hong Kong currency pushes up against the upper limits of its trading band of US$1 to HK$7.75.

In an attempt to halt appreciation of the local currency after it hit HK$7.75, the lower limit of its trading band to the U.S. dollar. The HKMA started selling Hong Kong dollars in the foreign exchange markets on October 19 2012. This was the first of such a move, the central bank had made since December 2009.

The link of the Hong Kong dollar to the US dollar was put in place in 1983 when negotiations about the future of the British colony after 1997 had sparked nervousness in the local business community.

In 2005 Hong Kong committed to keep the exchange rate between HK$7.75 and HK$7.85. The link has given Hong Kong companies stability in commercial contracts while tethering monetary policy to that of the U.S., where borrowing costs are being held down to spur hiring and prop up the housing market. Hong Kong’s jobless rate is near a four-year low and home prices are at all-time highs, as Bloomberg reports.

Property prices in Hong Kong are among the highest in the world as local and mainland Chinese investors have rushed to buy apartments in the city as a hedge against inflation.

‘The city had $301.2 billion of foreign-exchange reserves as of the end of September, amounting to about eight times the currency in circulation. The holdings grew 8.5 percent in the past year’, Bloomberg reports.

According to Bloomberg, the analysts said that the strong inflow of money into Asian currencies and stock markets has been prompted by increasing investor appetite for emerging markets as they sought better returns. In a recent note to clients, HSBC said that the more “equity-oriented” currencies such as the Indian rupee, the Korean won and the Taiwanese dollar had outperformed as money had flowed into local stock markets.

The recent strength in the Hong Kong dollar against the US dollar was in line with other Asian currencies because the US. Federal Reserve’s quantitative easing measures had also weakened its own currency. Stella Lee, president of Success Futures & Foreign Exchange Ltd. in Hong Kong, said to Bloomberg by telephone that “there could be more intervention” in Hong Kong.

According to the Financial Times, over the past couple of years, the fact that the dollar peg allows the local central bank little latitude to curb asset price inflation in the city through raising interest rates, for example, has led to calls from HKMA’s previous Chief Executive Joseph Yam, to reconsider the currency mechanism. ANZ said that it remained confident that the system would stay in place for the foreseeable future. “The intervention suggests that the HKMA will continue to defend the HKD peg,” it said. “The currency reserve is sufficiently strong to defend against not only normal capital flow but also speculative pressure . . . The HKMA intervention and recent strength of the HKD will probably be temporary and successful.”

Government officials, however, have stressed that the linked exchange rate serves the city well by giving the financial centre the stability it needs. The lack of convertibility of the Chinese renminbi also makes it an unlikely currency for the Hong Kong dollar to be linked to despite the strong economic ties between China and Hong Kong.

 I hope that you have enjoyed reading this post.

Stuart Yeomans 


Farringdon Group

Kuala Lumpur : Malaysia

Malaysia’s confidence in withstanding capital in-flows

As Asian nations take the necessary steps to prevent asset bubbles after the U.S. boosted stimulus, Central Bank Governor Zeti Akhtar Aziz has reassured the Malaysian community by saying that;

 ‘Malaysia can manage capital inflows due to monetary easing in advanced economies.’

Governor Zeti, speaking with confidence

Zeti who oversaw the Malaysian response to capital outflows during the Asian financial crisis more than a decade ago, also said;

‘The country has the tools and flexibility to absorb any excess liquidity.’

Zeti spoke confidently and this is because of the good news that the Malaysian economy is withstanding the impact of weakening global growth, with the gross domestic product forecast to expand about 5 percent this year.

The Malaysian Ringgit is also very strong; I personally remember the currency being over seven Ringitt to just one pound sterling around 5 years back. We are now looking at a conversion rate of around RM4.9 to GBP1.

Due to the Malaysian financial system reaching new levels of maturity in terms of development and its functioning, the cash flows that Malaysia are in receipt of, can be intermediated.

This is in regards to both surges of inflows and reversals. All these effects are disbursed through the financial system rather than concentrated.

Malaysia are not the only country confident of this; Brazil has also signaled confidence that it can counter any surge in flow stemming from the U.S Federal Reserves QE3.

I hope that you have enjoyed reading this post.

Stuart Yeomans 


Farringdon Group

Kuala Lumpur : Malaysia

Does Indonesia need Policy Tightening?

Speedy economic growth, together with massive credit increases and deteriorating current accounts have spurred fears among many analysts that Indonesia’s economy may be overheating, which may see the central bank of Indonesia being forced to increase interest rates.

Indonesia has seen a sharp deterioration in its current account position over the past year. However, this is largely explained by a slump in foreign demand rather than an unsustainable consumer boom driving up imports. Large inflows of foreign direct investment mean the country should have few problems sustaining a deficit over the medium term. While credit is growing rapidly at the moment, strong credit growth in part reflects a period of catch-up after a prolonged period of deleveraging which followed the Asian financial crisis. In addition, unlike in Hong Kong and Vietnam, there is little evidence that strong lending growth is fuelling asset price bubbles. Most new lending is being directed to productive sectors of the economy.

The recent performance of the economy has certainly been impressive. In 2011, GDP grew at its fastest pace since the Asian financial crisis (1997-98), and the strong growth has continued into the first half of this year. However, strong growth on its own does not mean the economy is overheating. To determine whether the current impressive expansion is sustainable, let’s look at four main indicators: the current account; credit growth,; inflation; as well as our estimates of trend growth.

There has been a sharp and sudden deterioration in Indonesia’s current account position, which has been in deficit for the past three quarters. However, while a current account deficit can sometimes be a symptom of overheating, this does not have to be the case. The worsening of the current account is not the result of an unsustainable consumer boom driving up imports. Instead it is due mainly to a sharp fall in exports, which is the result of weaker global growth and falling prices for the goods that Indonesia sells abroad.

As a low-income, fast-growing economy with plenty of opportunities to invest, it arguably makes sense for Indonesia to be importing capital from the rest of the world (in other words, running a current account deficit). Moreover, while a current account deficit can be a source of instability, this is unlikely to be the case in Indonesia. Unlike the last time Indonesia ran a current account deficit in 1997, the country is much less dependent on volatile portfolio inflows to fund the deficit. As a result, Indonesia is much less vulnerable to a balance of payments crisis than it was 15 years ago.

Another possible sign of overheating is rapid credit growth, which is now expanding by 25% y/y – one of the fastest rates of growth in the region. Strong credit growth which is sustained over a number of years is certainly something the authorities need to keep an eye on. Indeed, rapid credit growth was one of the main causes of both the Asian financial crisis, as well as the problems that Vietnam is now experiencing. Recent rapid credit growth in Indonesia in part reflects a period of catch-up after a prolonged period of deleveraging which followed the Asian financial crisis. Credit as a share of GDP in Indonesia actually fell from over 60% in 1997 to less than 20% in 2000. In 2011, credit in Indonesia was still the equivalent to only 30% of GDP, one of the lowest levels in the region. In addition, as an economy develops and the financial sector becomes more sophisticated, it is normal and healthy for credit to grow faster than nominal GDP.

As important to how quickly credit has been growing is where the new lending has been directed. There is little evidence that strong credit growth in Indonesia is fuelling asset price bubbles. Whereas places such as Hong Kong and Vietnam have seen a surge of lending into property, only 8% of bank lending in Indonesia has been into property-related sectors. As a result, while property prices have massively outstripped wage growth in Hong Kong, prices in Indonesia are increasing at a much slower pace than incomes. In addition, the stock market is also showing little sign of excess. Since the start of the year the Jakarta Composite has moved roughly in line with trends in the rest of the region. Moreover, the current price-earnings ratio of the Indonesian stock market is broadly in line with its long-run average.

Consumer price inflation was just 4.6% y/y in August, and is comfortably within Bank Indonesia’s (BI) central 3.5-5.5% target range. Admittedly, inflation is likely to rise before the end of the year due mainly to rising food prices which are being pushed higher by unfavourable base effects. A good harvest and the suspension of some import duties on food helped to suppress food prices last year. However, the any spike in inflation is likely to be temporary, and is not a sign of economic overheating. Core inflation, which is a better guide to underlying inflationary pressures, has been stable and is likely to remain low.

Indonesia’s economy grew by 6.5% in 2011. Despite the downturn in global demand, growth in Indonesia has barely slowed, with GDP expanding by 6.4% year-on-year in the first half of 2012. This compares with average growth since 2001 of just over 5%. This on its own is not evidence of overheating. Increased political stability and a rising investment rate have all helped to boost trend growth in Indonesia, which is now estimated to be around 6.5%. In addition, capacity utilisation in Indonesia is not unusually high, and is broadly in line with the average level of the last few years.

There also seems little danger of a wage-price spiral developing in Indonesia. Limitations with the data make it difficult to form firm conclusions, but wages appear to be increasing slowly. Meanwhile, a relatively high unemployment rate suggests there is still plenty of slack in the labour market.

Considering all of the evidence, it is rather unlikely that Indonesia’s economy is overheating. As a result there is little urgency for Bank Indonesia to tighten monetary policy. Indeed, given the poor outlook for global demand and the likelihood that the crisis in the euro-zone will worsen again soon, we believe interest rates in Indonesia will remain at their current record low level for the rest of this year and next. That being said, a further significant deterioration in the current account or a step-up in credit growth may see policy tightening.

I hope that you enjoyed reading.

Stuart Yeomans 


Farringdon Group

Kuala Lumpur : Malaysia