Hong Kong Forward Currency Speculators Bet On Revaluation

[LaoPo]

Hong Kong Forward Currency Speculators Bet on Revaluation

By Liz Capo McCormick

Nov. 1 (Bloomberg) -- Currency traders are betting in the forward exchange rate market that the Hong Kong Monetary Authority will abandon its currency's 24-year peg to the U.S. dollar within the next year.

In the forward currency market, an investor can buy Hong Kong dollars now for delivery in 12 months at a rate of 7.708 per U.S. dollar, above the 7.75 top of the Hong Kong Monetary Authority's permitted trading range.

The authority sold HK$7.828 billion ($1 billion) to defend the currency yesterday. The sale was 10 times larger than two previous purchases this month after Hong Kong's currency climbed to HK$7.75 per dollar, the top of its permitted trading range. Overseas investors have bet that Hong Kong assets will benefit from the growth of China's economy, which expanded 11.5 percent in the third quarter from the year before.

``The pricing in the forward market shows that money is being placed on bets that Hong Kong will re-value its currency,'' said Chris Turner, head of currency research at ING Financial Markets in London, who believes the authority will prevail. ``Currencies around the world with a dollar peg are under pressure given the U.S. dollar's weakness.''

The Hong Kong dollar, allowed to trade 5 cents either side of HK$7.8, was at HK$7.7502 per U.S. dollar as of 5 a.m. local time. The U.S. Dollar Index, measuring the dollar's performance against six major peers, has lost 8.5 percent in 2007 and set a record low of 76.465 yesterday.

Currency Band

In May 2005, the Hong Kong Monetary Authority introduced a band, pledging to buy or sell the currency should it rise or fall more than 5 Hong Kong cents from HK$7.8 to the dollar. Before that, it guaranteed to buy 7.8 Hong Kong dollars for every U.S. dollar.

A forward currency agreement allows an investor to buy or sell a currency at a future date at a pre-set price, and requires no upfront payment. Speculators use forwards to bet on price movements. As a hedge, a company can use a forward agreement to lock in an exchange rate for a future date, mitigating currency risk.

Among the estimated $3.2 trillion a day in foreign-exchange trading, turnover in the forward market is $362 billion, according to the Bank for International Settlements triennial survey published in April. Spot transactions were $1.005 trillion, the BIS survey said.

A spot currency transaction is one for which the exchange of two currencies typically is completed two business days from the time of purchase or sale.

Market Message

``What the forward market is telling you is that the pressure'' on the exchange rate band ``is not going to go away anytime soon,'' said Russell Jones, global head of foreign exchange and fixed-income research at RBC Capital markets in London, who believes the link will remain. ``The monetary authority is going to have to keep intervening to maintain the peg.''

The Hong Kong dollar has appreciated 0.8 percent versus the U.S. currency in the spot market since the Federal Reserve on Aug. 17 cut the rate it charges member banks for loans by a half-percentage point, to 5.75 percent. The Fed lowered that rate on Sept. 18 and again yesterday, by quarter-percentage point, bringing it to 5 percent.

The Fed also reduced its target overnight lending rate for loans between banks by a total of 0.75 percentage points, cutting by 0.5 percentage point on Sept. 18 and 0.25 percentage point yesterday. The Fed sought to prevent a U.S. recession amid the worst housing slump in 16 years.

The rate to buy Hong Kong dollars in 12 months time, or the so-called 12-month forward rate, was 7.785 on Aug. 15, compared to 7.708 now. The slide in the forward rate mirrors the appreciation in the spot market and shows investors are raising bets on how much the currency will gain over the next year.

From: http://www.bloomberg.com/apps/news?pid=206...amp;refer=china

Exciting times

LaoPo

[cclub75]

``What the forward market is telling you is that the pressure'' on the exchange rate band ``is not going to go away anytime soon,'' said Russell Jones, global head of foreign exchange and fixed-income research at RBC Capital markets in London, who believes the link will remain. ``The monetary authority is going to have to keep intervening to maintain the peg.''

Exciting times[/color]

Indeed. And it's exactly the same phenomena for... the THB !

Yesterday, Finance Minister said he authorized BOT to issue 500 billions (after 400 already this year) of bonds "as the tools to intervene the exchange rate market and prevent the further rise of the baht."

(nation)

THB is pegged to the dollar. Actually.

With capital controls, plus bonds plus increasing USD reserves... THB is pegged to the dollar.

And indeed, at one point, the dams are going to break. Like usual.

By the way... BOT didn't update the weekly position of its international reserves... Last was 19 october. Strange ?

Something to hide ?

Their strategy is obvious (and very costly) : they will wait for China to revealuate RMB, before to let THB going up.

The problem is : can the BOT wait for China ? It's a race against time in a way.

Edited November 1, 2007 by cclub75