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HK Dollar Peg Will Be Dropped Soon
Posted by Sad Sack (581 days ago)
If the USD continues its drop and the US maintains low interest rates to attempt economic stimulus HK must depeg its currency.
Otherwise inflation goes through the roof as the cost of all imports (well the cost of almost everything because almost everything we consume is imported) increases in cost.
Look at housing, HK is NOT the USA with its mortgage crisis. So the effect of low interest rates (US lowers, HK must follow) creates a different sort of bubble, a buying bubble as cashed up people keep buying property driven by low interest rates taking property to all time highs. Surely this cannot continue.
At some point the benefits of a peg to the USD are outweighed by inflationary pressures.
It will go. There will be no discussion of it in advance of course, nor will it likely go at a time when its expected to go.
We will wake up one morning soon to find its gone.
That's my gut feeling, what do you think?
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Posted by Sara Silvester (581 days ago)
That sounds scarry. What will happen if it is really depeg? Most of my family income now is in HKD? Any suggestion?
Posted by Sad Sack (581 days ago)
I am not an economist but I think this would be a good thing.
1. Depegging would almost certainly mean an increase in the value of a HKD against other currencies so you'd be wise to keep your HKD (I think the govt would peg against a basket of other currencies rather than free float the HKD)
2. This would reduce inflation dramatically as it would be cheaper to import.
3. Property market would likely slide because HK would not longer have to follow the US on interest rates. To maintain the strength of the HKD and keep inflation in check they would increase interest rates which would encourage inflows in HKD. Higher interest rates make mortgages more expensive thereby taming the property market.
I dont think we have to fear a depegging, the peg is with the USD because it was stable and strong for years. That is no longer the case and why should we stick with a dog?
Peg to a more stable currency or basket of currencies and we'd be better off without a doubt.
The turmoil in the US is far from done, and from what I am reading the USD will crash dramatically due to the massive foreign debt, burden of war etc... Watch the USD because that is what will trigger the depegging.
Other countries have already depegged due to inflationary pressures caused by their peg to the USD. Cost of everything in the shops is soaring and HK will not hang on forever.
Posted by Digital Blonde (581 days ago)
I am an economist, and I can tell you in my humble opinion, that depegging is not going to happen any time soon.
Posted by Sad Sack (581 days ago)
When it does happen anyone with a job related to finance will be the last to know to prevent speculation. They will never do it when it is expected we will wake up one morning and it will be done.
I'd be interested to know from Digital or anyone else why they feel it will not happen. If the USD drops lets say another 20% against major currencies wouldnt inflation go through the roof in Hong Kong? Wouldnt something have to give? Wouldnt that be the peg?
That is was has caused others to depeg, so why wouldnt HK?
Posted by Digital Blonde (581 days ago)
Actually a surprising amount of economies (primarily in the mid east) have chosen to keep their peg to the US for the moment. The only real notable exceptions are Kuwait and China, this despite inflation running plus 10% in those economies. The new common currency for the GCC looks like it too will peg to the US dollar, though there is still some debate because of course the dollar keeps dropping. The primary reason for keeping the peg is political rather than economic, The Monetary authority seem to be committed to it and even major currency speculators like George Soros seem to take the same view and he bet heavily against the peg in 98 and got burned.
http://www.bloomberg.com/apps/news?pid=20601080&sid=aM2JR0X3jaqM&refer=asia
HKMA Commitment
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=awGzqjDP2EC4
Soros View
It is possible that the peg to the US dollar will be dropped but I reiterate my view that it will not happen any time soon, and even when it does, it will be re pegged to a basket of currencies as other small and even sometimes large economies have done.
Posted by onemorething (577 days ago)
Unless the people take on the streets to protest food prices, there will be no repeg anytime soon, IMHO. You are right that when it happens it will all be done without any prior warning or notification.
I believe the dollar peg is damaging to the stability of the economy of HK.
Posted by Sad Sack (577 days ago)
5.3% inflation last month, thats based on costs of consumer goods without including property.
I dont think people will have to take to the streets, if the USD drops 20% further, there will be no choice because everything is imported in HK and every weakening of the USD/HKD results in a similar bump in the cost of living.
Wonder how long they will continue to allow this pummeling of the consumer?
Posted by Digital Blonde (577 days ago)
For a very long time my friend, they withstood currency speculators in 1998 and pumped over 100 Billion US dollars into the equity market on a single day just to prevent devaluation back then, I think the government has the wherewithal to continue its pegged exchange rate for quite a while and its not like our policy makers are democratically elected either, so they wont be worrying about re-election.
Posted by Sad Sack (577 days ago)
I was around for that but that was irrelevant to this discussion. Tsang pumped cash into the market to try to prevent a market collapse, this is a very different situation.
If the dollar dumps a lot more the entire fundamentals of the peg come into question. The USD peg provides stability and strength and if it not longer provides this (and other currencies do) then I am quite certain they will dump it.
What is the upside of keeping the USD peg if the USD drops another 20%? Why stay with a dog? Surely they will start to look at moving on if this happens.
Posted by leghk (577 days ago)
Interesting discussion. Is the devaluation of the dollar really inevitable? and if so, will this have a negative effect on Hong Kong and other Asian economies as exports to the US fall sharply, on top of the problems caused by the peg to the dollar???
Posted by Mr Cynical (577 days ago)
If the HK dollar is off the peg I dont think this would affect exports, because HK exports almost nothing (they re-export under a quotas scam whereby connected families hold quota for HK and Chinese exporters buy it and avoid duty by claiming made in HK). Obviously if the Yuan is allowed to appreciate this will affect exports.
I think the larger impact of dropping the peg would be on the property market. If the government has more control of its currency interest will immediately rise to combat inflation. And that will end any speculative activity in property as money is no longer cheap
Posted by Digital Blonde (577 days ago)
1998 is not irrelevant at all to the discussion, you were asking what would make the govt abandon the peg and back in 98 EVERY hedge fund/long only fund and his dog was both selling the HK Dollar and simultaneously selling the Hang Seng Index creating enormous pressure for HK to abandon the peg, which is what market participant were betting on. If the HK govt was prepared to withstand the pressure of global financial market participants in order to maintain the peg (substantial pressure), which might I add kept Hong Kong in sustained economic malaise by forcing HK to follow the US interest rate cycle whilst HK was recessing and the US was in the midst of a boom, then I don't really see the govt having to much problem maintaining the peg even with a 40% further drop in the US dollar against Sterling/Euro. They are under far less pressure to do so, and given policy makers here are not up for re election, public sentiment hardly constitutes pressure for them.
Posted by Mr Cynical (577 days ago)
Quick point that has been made on numerous occasions by jake van der kamp in his column, the hk government did attempt to fend off speculators but it was only delaying the inevitable if these funds would have continued their onslaught, it was only the end of the financial crisis (not Donald Tsang's decision) that saved the HKD at that time. Once these funds smell blood they have far too much money to throw around for even the most flush administration would ultimately be swamped.
Posted by Digital Blonde (577 days ago)
Agreed, the HK govt can hardly defend against against a concerted sustained global effort, but I disagree with the reason for the end of that particular speculative attack. 98 was still closer to the beginning of the financial crisis than the end in my opinion (having started in 97 and lasting at least three years).
If a speculator builds up a short position (or long position for that matter) in a particular asset as was the case with the HK dollar back in 98, then they would of course expect to make a return from having taken that position. What happened in the month of August or October 98 (i cant remember which) was that the HK Govt announced over the weekend if memory serves, that it was going to take measures to support the Hang Seng Index and by proxy the dollar. In effect telling every major speculator and fund manager in the world that it was going to take a long position in HK dollar and equity in advance of it doing so. Come Monday, every man and his dog took the opposite short position and both the currency and equity market was under attack for about three days straight, it was total bedlam.
If you ask me what ended it, I think it was lack of resolve on the part of the speculators at having to cover huge short positions unprofitably in the short run. The HK govt had spent some HK$160 Billion by the end of day 3 and still had some HK$700 billion of reserves to run through, and speculators lacked the will to fight. They basically didn't think the HK Govt had the wherewithal to defend the peg at all cost, which in fact it did.
If they had continued their actions for a longer period of time, inevitably the govt would have broken and a devaluation been forced.
Posted by ppatio (577 days ago)
The peg will only be dropped if consumers are hurting too much.
Right now, they are not.
The dollar may be very low, oil may be very high, but in 4 months time all of that may have changed.
Posted by transhk (576 days ago)
Sad Sack - the HK Monetary Authority is not reactionary. They are not going to depeg, due to people dumping the US$ over a few years. As with all things we will see a balance over time. Chill.
Posted by camo2005 (575 days ago)
Does the HKMA really have a say in this ? I think Beijing decides this in reality (not officially though).
If they depeg will there be a peg to the yuan or a basket? Or a basket that practically follows the yuan one?
Posted by Digital Blonde (575 days ago)
I think its the HKMA, they will of course consult with Beijing, but when it comes to Hong Kong's finances Beijing has been remarkably good about not interfering.
Posted by alas9495 (570 days ago)
Removing the peg to the dollar would have a positive effect on the HKD and would appreciate in the same way the RMB has appreciated in China. It would have a positive effect on prices as most items are imported into HK so with a stronger currency the cost of imports would decrease. Housing prices would be negatively affected (and sadly this always seems to be the most important issue in HK) as interest rates would rise to cool off an increasing economy. Another factor that would lead to lower housing prices is a stronger HKD makes it more expensive for foreign investors to purchase as their currencies are worth less against a rising HKD. The HKD would rise because higher interest rates add to astrengthen currency scenario. Investors prefer a currency with a good yield and the higher the interest rate differential between the USD (low rates) and HKD would entice investors to hold a higher yielding currency. Selling USD and buy HKD drives up the HKD price like any basic supply and demand scenario.
Over time it is possible to remove the peg (think China, Malaysia) but probably won't happen overnight. The most appropriate immediate measure is to widen the band allowing some market influence on the value. Over time as HK becomes more integrated with China the peg should be dropped but although the USD is down it's not out. It would be poor fiscal management to take a knee jerk reaction and change monetary policy based on the last year and current negative dollar sentiment. Part of the reason for HK economic and monetary stability is because of the peg. Chooe any Asian currency as an example that has not been hit hard market forces in the last 10 years or so. HK weathered these problems because of the peg and because of the HKMA's financial strength to fight off speculators.
Posted by Blueberry78 (569 days ago)
What about an obvious practical solution? RMB becomes a convertible currency and HKD disappears and is simply replaced by the RMB overnight?
In the current situation, HK people won't be scared, they are already trying to covert as much HKD in RMB as possible.
What do you think?
Posted by Digital Blonde (569 days ago)
I think that would be a disaster.
Posted by axptguy38 (569 days ago)
"What about an obvious practical solution? RMB becomes a convertible currency and HKD disappears and is simply replaced by the RMB overnight?
In the current situation, HK people won't be scared, they are already trying to covert as much HKD in RMB as possible.
What do you think?"
I think people would be scared s**tless. Currencies only hold up as long as people believe in them. They are, in fact, a collective illusion. Doing that sort of thing would, as Digital Blonde says, be a disaster.
Posted by walkup2 (562 days ago)
Actually the peg is good for exporting to mainland China as prices become more competitive. Also with the peg in place, HKD does not appear in a currency speculation firing line. All in all it has been a stable force over the last 10 years.
Posted by dadda (562 days ago)
The RMB 1 year forward contract fell 1.4% yesterday. It is now possible that the mainland will look to devalue their currency, possibly in a 1 off move. This is why the China equities (and hence HK) fell yesterday.
I am very thankful that the HK MA is a well respected and well managed unit. The US$ peg is the best thing for HK in the long run.
Posted by sxc (562 days ago)
Of course, many expats would like the peg removed. Our HKD salaries will be worth more in our home countries.
However, for locals (> 95% of the population?), they like the peg due to its affect on property prices. Yes they will have more expensive rice, but that is outweighed by their gains in their property prices.
I recall reading an article in the SCMP a month or so ago about why the peg is great for HK locals. I can't remember all the arguments, but it made a very good point that popular consensus in HK is for keeping the peg.
Posted by axptguy38 (562 days ago)
"Of course, many expats would like the peg removed. Our HKD salaries will be worth more in our home countries."
Not those of us with income in USD! ;)
Posted by Virgil Tibbs (561 days ago)
Very interesting discussion! I often wish we had a stronger currency when travelling.
Can anyone shed more light on the import/export scam that Mr Cynical alludes to above?
I've read about this a few times but it never made complete sense.
Thanks
Posted by IslandHopper (561 days ago)
"Can anyone shed more light on the import/export scam that Mr Cynical alludes to above"
It's not an import/export scam and it's more about the past than today.
Basically the major area where this re-export was used was garments and textiles. US and Europe used to have import quotas and to these items made in China, but not made in HK.
So made in China garments turned to made in HK garments after crossing the border.
Posted by Whitemischief (550 days ago)
Perhaps they will switch the peg to the Zimbabwe Dollar before the US Dollar finally collapses!
Posted by b3nj0n (532 days ago)
Very interesting topic. Made me register with asiaxpat.com . At this time, would HKD still go depeg? US economy seems recovering... and considering US election is coming, am sure US will slowly recover.
Newbie Question: I am actually have been relocated to SG (from HK, just this month), would I leave my savings in HKD, or should I transfer it to SGD? And considering my salary is now SGD, would I send my savings to my HKD savings account in HK? or should I just leave it here in SGD?
Posted by onemorething (531 days ago)
b3nj0n said:
US economy seems recovering...
What makes you say that? Last time I checked house prices are down 15% yoy. Unemployment rose from 5.0% to 5.5% mom.
b3nj0n said:
and considering US election is coming, am sure US will slowly recover.
Surely not... the whole election is the reason all the economic news has not been as bad as it really is. Wait until after the US elections to see a real economic slump.
People like yourself thought the dollar would rebound at 1.35 (vs euro), then at 1.45, and now at 1.58 many people still have faith in this make-believe fiat currency.
b3nj0n said:
would I leave my savings in HKD, or should I transfer it to SGD? And considering my salary is now SGD, would I send my savings to my HKD savings account in HK? or should I just leave it here in SGD?
Where do you plan to spend your money in the future? Why would you save HKD if you don't live in HK? Unless you have a strong view on the HKD of course, but it better be based on more solid arguments than you gave in your posting.
Anyway... welcome to Asiaxpat! :-)
Posted by Digital Blonde (531 days ago)
There may have been people who thought the dollar might rebound ( I didn't know that many to be honest, people have been predicting a dollar crash since I was 17), but there were far more people out there who were bearish indicated by the direction of the currencies value against its competitors.
After the US reneged on Bretton Woods and Nixon abandoned fixed exchange rates and the gold standard, pretty much all major currencies followed suit and are make believe or fiat, backed by nothing more than the faith people and institutions place in the issuer and the system. Just because one happens to be falling in value doesn't make it any less believable than another. The US is still the largest economy in the world and the worlds largest importer by far, it is only natural that the US dollar is still the most widely accepted of all fiat currencies. That will change in due course as the world itself changes. Unless of course you favour people adopting The Pound as the worlds reserve currency because its value has been rising.
Posted by axptguy38 (531 days ago)
"many people still have faith in this make-believe fiat currency."
All currencies are "make believe" in so much as they only have value so long as people believe they have value. As Digital Blonde says they are backed by nothing more than faith.
Posted by ronrico (531 days ago)
The way the weak dollar is affecting food prices -and inflation- in HK, is scary.
However, the oil price is manipulated by fast-buck speculators at the moment.
Soon, the price of oil will drop like a brick.
Posted by Digital Blonde (531 days ago)
I really dont think that is going to happen. thats just my view.
Posted by onemorething (530 days ago)
"All currencies are "make believe" in so much as they only have value so long as people believe they have value. As Digital Blonde says they are backed by nothing more than faith."
All major currencies are indeed. What makes the USD extra vulnerable is the potentially inflationary actions by the Federal Reserve, by underwriting risky assets from the investment banks. (In the Austrian School's definition of "inflation", not "price inflation"). M3 has been extremely inflationary in the US, but admittedly also in the eurozone. The only positive is that USD M1 is very stable and actually on the verge of contracting.
The weak dollar is not the only reason we are experiencing food price inflation in HK, but a stronger HKD would definitely have contained (food) price hikes, as well as asset price inflation (e.g. real estate).
The whole notion of oil price being manipulated by speculators is a very mis-informed view in my opinion. Speculators don't take delivery of oil, so they have to sell oil before their future contracts expire. So unless we witness stock piling in oil, and in fact we see the opposite, there is no speculative bubble in oil, I am afraid. I am with Digital Blonde on this one: oil price is not likely to "drop like a brick" anytime soon.
Posted by Digital Blonde (530 days ago)
If you buy a futures contract and you are just speculator, you can take delivery of the physical commodity once the contract expires, if you believe that future price increases are going to be greater then the price you paid plus storage costs and other costs of carry. In fact Oil storage as an ancillary business at the moment is attracting a lot of investment. The fact that oil inventories have not measurably risen, suggests this is not happening however.
http://www.nytimes.com/2008/05/12/opinion/12krugman.html?_r=1&oref=slogin
I am a fan of Krugman, though those on the right are understandably not, but he makes the same argument that inventories are not rising, so there is no stockpiling or hoarding as has happened in the past with previous oil shocks, which means it is unlikely to be a speculative rise. There will of course be speculation built in the price, but I don't believe anymore that is what is driving it.
Posted by Ed (530 days ago)
Re: The Price of Oil.
If you follow our links to top news stories you may have seen that GM has taken a huge change in direction and are going full on into plug-in/hybrid cars (Jolt is the brand they will roll out). The reason - CEO Rick Wagoner has seen the writing on the wall and feels this is not a cycle of expensive fuel - this is the new reality.
There will be some pain for a bit but hopefully this will be the beginning of the end of fossil fuels and clean(er) technologies will emerge.
Posted by axptguy38 (529 days ago)
Electric and hybrid cars are all well and good but the power has to come from somewhere. If you're burning coal or oil at a power station in order to generate the electricity for the car you may be gaining in efficiency but the underlying problem is not eliminated.
Hydroelectric has limited expansion potential. The only currently viable large scale alternative to fossil fuels is nuclear power. I'm all for it. It's safe and clean (radioactive waste is manageable nowadays and in any case it's nothing compared to fossil fuel byproducts). However there is a lot of political and popular resistance.
Posted by Digital Blonde (529 days ago)
Not knocking nuclear, because I think its also the way to go, but being uninformed, what happens if we moved substantially into nuclear power say the majority of the worlds electricity was generated that way. How much radioactive waste would that produce and would it be dangerous?
Posted by axptguy38 (529 days ago)
You raise a good point. Radioactive waste is always dangerous, but most forms of power generation produces toxic waste. Hydroelectric and solar would be the exception but they are only scalable so far.
A fair sized reactor will produce about 25-30 tonnes of spent fuel. Obviously the levels of radioactivity in that material are quite variable. The spent fuel can be reprocessed, further decreasing radioactivity levels (and incidentally producing more power), and decreasing the volume to about 3 cubic meters per year.
Some quick research showed that "High Level Waste" currently increases worldwide by 12k tonnes per year. Presumably if we went massively nuclear we would be talking several hundred thousand tonnes per year. It does sound like a lot but these elements are quite dense so the volume is not as much as one might think.
It is important to note that the toxic waste produced by nuclear power is only a small fraction of that produced by everything else (other power generation methods, chemical plants and so forth).
It is often said that France, the most aggressive user of nuclear in Europe, also has the cleanest air in any industrial nation and the cheapest electricity.
It is also interesting that the so called "effective does" from coal plants is in fact 100 times higher than that from nuclear plants. As soon as someone says "radioactive" it sounds bad, but compared to other pollutants, nuclear power stands for a very small part of deaths from catastrophic and non catastrophic industrial events, and a very small part of industrial waste. Nuclear power is also extremely highly regulated when it comes to waste management. Compare that to chemical plants and oil/coal plants that in many countries routinely dump their barely processed waste overboard.
I see nuclear power as being to power generation what air travel is to transportation. Very safe, but as soon as there is a plane crash we're all glued to the TV. Driving is far less safe, but it's somehow a bit beneath our notice.
Posted by b3nj0n (527 days ago)
Posted by onemorething (4 days ago)
Where do you plan to spend your money in the future? Why would you save HKD if you don't live in HK? Unless you have a strong view on the HKD of course, but it better be based on more solid arguments than you gave in your posting.
Anyway... welcome to Asiaxpat! :-)
------------------------
Thanks for your warm welcome :)
Aside from my strong feeling about HK, I will still come back to HK once in a while to visit friends. HK is such a safe and convenient place for me.
Also, if my money is in HKD and it suddenly depeg... then, I will be laughing... go go go.. HK, depeg now!!! :)
So, I'll probably leave my HKD in HK accounts. And I'll just start my new savings in SGD while am here in SG. No point for me to transfer my HKD to SGD now since I won't need the money here anyway.
I'll be watching this post...
Posted by Mr Cynical (523 days ago)
Obviously this will ensure the peg stays but the property market will be pounded if interest rates bounce.
Posted by Digital Blonde (523 days ago)
Pretty sure interest rates will rise
Posted by onemorething (522 days ago)
The more people talk about a dollar rally, the less likely it will happen. It will happen the day that every single person in the world does not believe in the dollar anymore. Until then it is most likely wishful thinking. Analysts have been talking about a dollar rally ever since it fell through $1.45 to the euro (early November 2007).
There are a couple of rate hikes (for USD) priced in, but I strongly doubt it. The Fed's mandate is economic growth and containing consumer price inflation, and not the value of the dollar. Despite all the jaw-boning by Bernanke & Co about fighting price inflation, I believe that the US economy and housing market cannot digest rate hikes. The inflation threat is highly over-rated with a contracting M1 money base. Every single asset class is deflating, which will mean that consumer prices will eventually follow suit. The US economy is starting to look more-and-more like Japan over the last 18 years. Next rate move will be a quarter point... down!
Disclaimer: This is not financial advice and should not be taken as such.
Posted by Digital Blonde (522 days ago)
I disagree with that, oil/gas prices and food prices are the two major constituents of any inflation index, if they are experiencing double digit growth in prices as they have, then inflation will and is occuring regardless of whether m1 money supply is contracting. I am not sure where you got that information on m1, but in this case I think its largely irrelvant. The dollar has already started to rally and I believe it will continue to do so though not as far as some people expect. I think the Fed is going to raise rates, because even worse then inflation is the threat of stagflation, which given the state of the US economy is a real possibilty.
Posted by onemorething (522 days ago)
Two words: Japan 1990.
Should one fight stagflation by tightening (attack price inflation) or easing (stimulate economic growth)? Hiking rates will accelerate the deflation of the existing asset and credit bubbles, which has my preference. Politically that may not be so desirable; certainly not before the US elections.
The dollar is stuck in a trading range of 1.5350 and 1.5850 per euro. It has been moving sideways for the last two months.
Posted by onemorething (522 days ago)
I go along with the author of that article a long way. The wage-spiral "inflation" (we are talking consumer price inflation) is not prevalent in the US. Employees are in no position to demand pay rises, because of the state of the economy. The author does not go very deep into the fact we are experiencing imported consumer price inflation (oil and food) in the developed world. You can raise interest rates as much as you like, but it will not affect the price of oil very much as long as China and India keep on buying oil and get away with printing money. China gets away with printing money (for now) because the US allowed the trade balance to be too negative for too long. So raising interest rates in the US will only push the US deeper into a recession. Bernanke knows this, and will not take the gamble.
Posted by Digital Blonde (522 days ago)
Actually he almost omits it or says its not relevant, and that inflation only occurs if there is a wage price spiral. Which is true but only half the story. He says that there are two types of inflation, demand pull and cost push which is really very basic economic analysis something that a 15 year old student would use to analyse the situation, he fleetingly talks about inflation expectations governing worker contracts, basically denying that a cost of living index rise means that there is inflation in the economy, and that weak demand means workers will not ask for wage increases. He is actually analysing the australian economy, and you try telling an iron ore miner in the outback not to ask for a wage increase if there is say 10% increase in prices.
speaking as a masters in economics who couldnt be bothered to do a Phd
For a start stagflation occured in the 70's to deny its existence is revisionist. Secondly he even has his definition of stagflation wrong, he should look it up in the dictionary, thirdly if people come to expect high inflation rates, they will demand wage increases regardless of the state of the economy, otherwise real incomes get hammered and people are worse off just as occured in the 70's. Finally and most importantly if a consumer price index is rising, that is inflation, the fact that nominal wages are not increasing yet is neither here nor there.
An independant central bank's first priorty in most cases is inflation, it has the tools to tackle it, unemployment and growth are secondary objectives and its tools to tackle it are blunt at best. A rising consumer price index is going to have the central bank very concerned is my view, and to omit the word stagflation for the sake of argument, it would be a more pressing issue if their was weak consumer demand, persistently high unemployment, and rising prices simultaneously. I see an interest rate hike, but thats just my opinion
Posted by HKhereIcome (521 days ago)
Depegging is too drastic and won't happen soon (damages confidence too much). But as the many posts here indicate, the peg is straining. HKMA has to balance the HK$ against the US$ and Yuan; not an easy task. My money's on a readjustment to 7.6-7.7 by the end of the year or within 12 months.
But I wouldn't worry too much until I see HKMA increasing its gold stocks massively.
To the gent asking about Singapore$ - it is the best, most stable regional currency. I'd keep much of my savings in S$ if I were you.
Posted by axptguy38 (521 days ago)
There is also a concern about expat workers. HK has a disproportionate amount of expat workers in finance and other industries. Many are on expat packages. Their salaries are often based on some measure including the value of the Honkie vs the "home" currency. If the Honkie is depegged and appreciates significantly, such packages become a higher cost item for the employers.
Not saying this is a prime move behind a decision, but it is a factor.
Posted by Digital Blonde (521 days ago)
I personally don't believe it would be a factor, I think the absolute numbers of people involved are far to small and I think all that would really happen is future contracts would be re negotiated to take account of the fact and when current bonus is calculated, which constitutes majority of a person who works in finance's income, then if the move was significant it would be reflected in their bonus. But it would have to be a significant move to have any real bearing on bonus.
Posted by axptguy38 (520 days ago)
A lot of money flows into HK from finance companies. HK is the most important financial center of the Far East. If lots of companies suddenly decide SG is cheaper. ;)
A factor, but probably other things are way more important.
Posted by sxc (520 days ago)
I think the effect on property prices is a greater factor in considering depegging the dollar. Much of HK's wealth is tied up in property. Big drops in wealth = social unrest = a situation communist countries don't like.
The effect on expats is really a very small by-product compared to wellbeing of the larger HK population.
Posted by Digital Blonde (520 days ago)
I really don't see investment banks relocating to Singapore if there is a revaluation of the Hong Kong dollar upwards to contain costs. Hong Kong is the financial center of Asia because it is a Chinese city, and with so many Chinese companies listing on the exchange, it just wouldn't make sense, the business is here not in Singapore. That would be like banks moving out of London because the pound is so strong and there are far more foreign workers in London. If there was a move, some hedge fund managers may do so but only because Singapore is already the hub for that, and they would be far and few between, if they are worried about the impact of an appreciating currency on salaries they would renegotiate contracts and any real difference would be taken out of current bonus to reflect increased incomes.
Posted by HKhereIcome (520 days ago)
hmmm... most of the discussion is neither here nor there. For those really keen, I'd suggest reading the HKMA balance statements to get an idea where they are headed.
For most individuals, what really matters is on the personal level - for these, my advice is: (1) if you have a choice between HK$ and US$, ask for your salary etc in HK$ - the adjustment, if it comes, will only be upwards. (2) Save in a range of currencies - most of us will be saving in our home currencies and HK$. My suggestion is to try something else: S$ for instance (because they have committed to a gradual rise against the US$ for the foreseeable future), Yuan (although there may be a chance of a small devaluation soon). Aust$ is probably at the peak now, but any decline would be small, so it's a good store. If you distrust fiat money, try gold or porkies.
If, on the other hand, you are investing zillions, well, you wouldn't be getting free advice from me! :)
Posted by Digital Blonde (520 days ago)
I dont read the HKMA statements, because I cover a separate area my research team do however. I am familiar with their behavior from the currency crisis in the late 90's,When Donald Tsang was the finance secretary and when Joesph Yam speaks, I tend to listen. my view is if they successfully defended the Peg whilst coming under enormous speculative pressure globally, spending US$100 Billion dollars to do so, Then I dont see them abandoning the peg, when they are not under financial attack, and the pressure they face stems domestic inflation. These policy makers are unelected, they have no pressure to please constituents. They're concern would be Property developers and other big business which control the cartel, and an upward revaluation could be disastrous for them. I really dont see the end of the peg any time soon. What I think is feasible is perhaps a gradual timeline towards its eventual demise. But I am not a policymaker so I do know what they are thinking.
As for Gold Warren Buffet has an interesting take on gold which is rather amusing
Buffet emphasized, the non-productive aspect of gold in 1998 at Harvard: "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
well I thought it was amusing
Posted by DaHKGKid (505 days ago)
Yes, I also support that a re-adjustment is going to occur moving downward to 7.6/7.5 next 12 months to align with asian currency appreciation. Some say the dollar would also float as another asian currency until it can be rolled up under the RMB/Yuan.
Posted by Digital Blonde (505 days ago)
I personally cant see either of those scenarios happening myself.
Posted by onemorething (505 days ago)
Monetary inflation in the last five years have laid the foundations for a serious debasement of many Asian currencies. Vietnam(-ese Dong) is the classic example. I am worried that the contagion will spread. HK will use that as a reason to keep firmly pegged to the USD at current trading band.
The more I think of it, I don't expect any re-pegging. The only plausible scenario will be a forced breakdown of the peg and that will be very ugly in current economic environment.
Posted by sxc (505 days ago)
I agree with Digital Blonde: If they successfully defended the peg during the Asian Currency crisis storm, they will defend it during the current environment is which is less than a sneeze compared to the 97 currency crisis.
Posted by onemorething (505 days ago)
"Everybody" in HK called the 1996 Asia crisis (that started in Thailand) "less than a sneeze" compared to Black Friday 1987. Unfortunately for them they were proven wrong in 1997. The current credit crisis is going to be something resembling a stroke, not a sneeze, as I suspect we will find out in 2009.
Obviously I hope to be proven wrong!
Posted by Digital Blonde (505 days ago)
I don't remember people discounting the currency crisis as being less than a sneeze, it started in South America and moved very quickly into Asia with countries falling like dominoes, I think more than anything people were shocked by its veracity.
Posted by onemorething (505 days ago)
I did not live in HK in the 90s. But the HSI reached a then all-time high in 1997, one year after the Thai SET Index fell from 1400 to 800 in 1996 (and finally hitting bottom near 200 in 1998).
Neither did I live in South America in the 90s, but the 1994 Mexican Peso crisis was very serious, although in the end appeared reasonably contained to a few Latin American countries.
These things always catch on (too) late with the general public.
Posted by Digital Blonde (505 days ago)
I really don't think the currency crisis caught on too late with the public, I was here when it happened, and I was working on a trading floor, as soon as those currency markets started going south and then started forcing devaluations, pretty much every equity market in the region tanked. Prior to the crisis there was a real bubble, every man and his dog were buying stocks particularly in Hong Kong, the minute institutions got a whiff of potential devaluations, they were gone so fast, you didn't have time to blink. It was hard, it was fast and it was severe, which contrasts significantly from the current issues we are facing, though almost as bad, the drop has been much more protracted and confined largely to financial institutions. The currency crisis hit everybody simultaneously and there wasn't a person in Asia that didn't feel it. When your currency falls in value 30% and your equity markets fall 50% or more in the space of a few weeks, people feel the effects pretty immediately.
Posted by Digital Blonde (505 days ago)
I don't see how that economist can make the prediction that inflation will not persist beyond autumn. If energy and food costs keep rising, so will the inflation rate, its really not rocket science. Personally speaking I am pretty sure we are at the beginning of a tightening cycle, unless we see a correction in those staple prices, I don't see how we couldn't be.
Posted by onemorething (408 days ago)
It is official now: interest rate cut by the Fed it is!
The credit crisis has finally caught the attention of the (HK) investors/speculators. Too late for most of them now that the HSI has fallen more than 50% from its peak. I am not calling a bottom here, btw.
The financial markets are going to be very very ugly and messy well into 2009 and beyond! And so will be the HK property market. The peg is not really under fire (yet). There are once-in-a-lifetime events ahead of us that will test the very viability of our fiat-money capitalism.
Posted by Lehman Wong (408 days ago)
I don't own property or stocks, so i am fairly objective here: this global 'crisis' will have stabilized in a month or 3.
And HK property will touch many new bottoms.
Posted by DaHKGKid (41 days ago)
Is this discussion worth and updated view? Where is the HKD headed? Will it float, will it be linked to the RMB? Views?
Posted by Ed (40 days ago)
I'd have to think that if HK depegs that will send the USD into a spiral because it will send a signal that confidence is gone...
I can't imagine the HK government will want to be the one to send that message out as China wouldn't be very happy.... so I think we will hang on unless the USD seriously tanks leaving no choice...
So I think the question is how far will the USD fall against major currencies and at what point would the HK govt abandon it...
Posted by DaHKGKid (39 days ago)
I'm waiting for one more USD flight to safety recovery and retest of markets, then I am out of USD and HKD. I dont think anyone in HK will wait either!
Posted by onemorething (39 days ago)
@DaHKGKid
That's why it won't come. Last year's dollar squeeze will not be repeated because there is no shortage of dollars or dollar funding any longer.
Posted by cyberience (39 days ago)
more Rumour creating, I have heard the same stuff over and over for 20 years, it never happens, just like I hear the property prices are to high, and then they go up more, thats why so many X-pats don't own property.
Posted by dadda (39 days ago)
DaHKGKid - I am in HK & I will wait....
Posted by Ed (27 days ago)
Implications for the HKD in this...
Why a weak dollar threatens America
It seems nobody in this country wants to take responsibility for the secular decline in the value of the U.S. dollar. When Fed Chairman Ben Bernanke is asked about the currency's decline, he refers the query to the Treasury Department. When the president is asked about the dollar, he often gives the tired old platitude that the U.S. has a strong dollar policy, but his vacuous words seem more like a perfunctory utterances than a bona fide dollar-boosting strategy.
Recently, in an interview with CNBC's Maria Bartiromo, Treasury Secretary Timothy Geithner had some startling comments about the world's reserve currency. When asked about its chronic weakness, and what specifically he was doing to safeguard the dollar, Mr. Geithner said, "…if you look generally, you know, I don't talk about developments in the exchange markets." He continued, "If you look at what's happened over the last year, you've seen really a lot of confidence in the U.S. economy. When the crisis was at its peak … you saw the dollar rise when people were most concerned about the future of the world."
Now that the U.S. dollar is once again caught up in a vicious secular bear market, losing nearly 16% of its value since March alone, the Treasury Secretary is once again opting to plead the fifth. Even worse, he claims that last year was a good example of global confidence in the currency, even though it was down over 8% for the year.
Can he really be counting on another collapse in the global economy to pull the dollar out of its downtrend? To use the previous year as an example of confidence and strength in the country, or the currency, is spurious in nature. It illustrates that our Treasury Secretary either tacitly condones a falling dollar or has no idea what causes a weak currency.
The progenitor of our weak dollar is the skyrocketing monetary base, which reached an all-time record high of $1.86 trillion last week. The Fed's monetization of banks' assets has caused real interest rates to become negative and increased interest rate differentials with the currencies of more sober central bankers, like Glenn Stevens from Australia. In addition, our profligate spending habits have caused record budget deficits and even caused our healing trade deficit to reverse course and head higher. Unfortunately, all those trends seem firmly intact and are actually growing worse.
There is, however, no shortage of gurus who will tell you that a weakening dollar is great for America. They'll tell you that it boosts exports and the earnings of domestic companies that conduct business on foreign soil. Their logic is flawed. First off, a falling dollar has actually pushed our trade deficit higher--not lower. If a weak dollar bolsters our economy and our manufacturing base, then why has the trade deficit surged since 2001, even as the dollar lost nearly 40% of its value based on a basket of the six currencies of our largest trading partners?
http://www.forbes.com/2009/10/21/falling-dollar-geithner-personal-finance-foreign-investment.html
Posted by axptguy38 (27 days ago)
Nice article. However I am confused by the use of the word "secular". How is the bear market rejecting or unrelated to religion in this context?
Posted by onemorething (26 days ago)
"Secular" as in "non-cyclical".
The depreciating dollar is putting the cost of bailouts at the US of A's creditors. If I may make a bold prediction: the dollar will ultimately be replaced by the "New US Dollar". All domestic accounts receiving 1 NUS$ for every 1 US$. Every overseas holder of US$ will receive 1 NUS$ for every 10 US$.
Posted by DaHKGKid (26 days ago)
Yes I agree it will be replaced with a new USD, but not until we see another flight to safety during the next step down. I am calling for a simple repeat of last November which will be based on this new bubble formed and currencies were back in line.
I believe Geithner & Bernanke know this. It was a windfall payment for all their buddies at the US taxpayers expense and to get everyone to think about (just the sheeple) to get adjusted to trimmer living.
Then the USD tanks as Onemorething says above, they then dump the old USD, 10-1 and value it at say $0.60 on the index, the US turns the corner and starts exporting, goes on a protectionist binge only to save themselves.
Funny how a DELL call centre goes back to the Yanks!
Posted by Craig Shergold (26 days ago)
Excuse me for stating the obvious, but wouldn't it make more sense to link the HKD to the RMB ?
Hong Kong is part of China and the economic ties are massive. And the currencies have vitual parity.
I remember when the 'peg' was imposed. I remember when the USD bought only HK$ 6-. And then the uncertainty about 1997 and some other factors caused havoc and the USD went to almost HK$ 10-. At that time the peg was a God-sent.
But now things have changed a lot. Maybe time for a re-think.
Posted by DaHKGKid (25 days ago)
That's the obvious as stated above in this link since the beginning OR trading under a basket of asian currencies.
Posted by axptguy38 (25 days ago)
"Excuse me for stating the obvious, but wouldn't it make more sense to link the HKD to the RMB ?"
Maybe. However the most important factor for a currency is confidence. If people have confidence in the value of the USD, and therefore the HKD, that's good enough. Changing to an RMB peg introduces massive uncertainty in the short term. This has to be balanced against long term benefits.
In other words: If it ain't broke, don't fix it.
Sure, the USD could become a banana republic currency, but if that happens it is probably a relatively short term thing. Pegging and re-pegging should not be done in response to short term (12-24 months) effects.
Posted by onemorething (24 days ago)
Pegging your currency is about handing over your monetary, economic and even political sovereignty to the country of the underlying currency. What is good for China and the RMB may not be good for HK. I would argue that it is better to be "one country two currencies" than "one country one currency". Investors prefer certainty over uncertainty and stability over volatility. Hence the HKMAs fight to hold on to the USD peg.
Posted by cookie09 (24 days ago)
"Excuse me for stating the obvious, but wouldn't it make more sense to link the HKD to the RMB ?"
not sure this has been written already but you cannot peg to a non-convertible currency (of course you could, but an open economy like hk cannot in reality)
Posted by Topol (24 days ago)
The ultimate aim must be to replace HKD with RMB but this will only occur once the RMB is fully convertible. The capital controls are very slowly being relaxed - you can withdraw RMB from your ATM and use RMB to pay for most things in HK if you wish. I doubt that HK will abandon the peg but will choose to pahse out the HKD as the RMB becomes a convertible currency - but when is anyones guess.
Posted by Craig Shergold (24 days ago)
...if it ain't broke, don't fix it...
I have this nagging feeling that something is broke. Euro exports to HK getting more and more expensive, and that hurts us consumers. And considering the irresponsible debt increases in the US, I don't see thing improve anytime soon. (soon = next five years)
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