Hong Kong and Indonesia reflect growing pressure on EM currencies

Hong Kong and Indonesia reflect growing pressure on EM currencies

Strengthening US dollar forces further intervention from HK’s de facto central bank.

A strengthening US dollar intensified the pressure on emerging markets in Asia with Hong Kong’s Monetary Authority forced to once more defend its longstanding currency peg, while Indonesia’s rupiah touched its lowest level in nearly three years. Emerging market currencies across the board have been sliding for the past month as the dollar has been bolstered by signs of stronger US growth and higher interest rates. While Argentina and Turkey have led the EM sell-off, signs of pressure have been apparent in Asia. The HKMA’s intervention on Wednesday, using its reserves to sell US$200m and buy HK$1.57bn, marked the 14th time that it has stepped in to prop up the persistently weak local currency in the past month, The de facto central bank has spent a total of HK$52.9bn of its reserves as the US dollar has rallied. Indonesia’s rupiah dropped on Wednesday to its weakest level since late 2015 against the US dollar, weakening as much as 0.5 per cent to 14,109 per dollar, a day ahead of the Bank of Indonesia’s interest rate decision. Mansoor Mohi-uddin, a strategist at NatWest Markets, said: “The more highly-traded Asian currencies, like Korea and China, have also come under pressure. In Korea, it comes after the news that it could cancel its scheduled talks with the US. Hong Kong’s currency is pegged to the US dollar, trading within a band of HK$7.75-HK$7.85 against the greenback. The HKMA is required to support the peg if the Hong Kong dollar slips to the edges of the band and if other banks request the authority to take action. However, the move to drain the excess liquidity in Hong Kong’s banking system is expected to lift the local short-term interest rate, called Hibor, which analysts said would weigh on borrowers and the property market. The expected increase in US interest rates in June would add further pressure, as Hong Kong tracks US rate changes as a result of its currency peg. HKMA’s actions have already had some impact, with three-month Hibor rising from 1.2 per cent in early April to 1.75 per cent, its highest level since the end of 2008. Chang Liu, China economist at Capital Economics, said he expects three-month Hibor to rise to nearly 3 per cent by the end of next year. “This would put Hong Kong’s overheated property market under strain: around 90 per cent of new mortgages in Hong Kong are priced off interbank interest rates.”

The HKMA has issued warnings to borrowers. Earlier this month, the de facto central bank urged the public to “prepare for possible volatility in local interest rates”. However, some analysts said Hong Kong still has ample excess liquidity, with HKMA’s aggregate balance — the amount of bank reserves it holds — falling to HK$127bn from about $180bn a month ago.

Cliff Tan, East Asian head of global markets research at MUFG, said: “Mortgage rates will not be affected so long as this level of excess liquidity is around.“ He said he is forecasting a “gradual” rise in interest rates. “So I don’t think this will be an issue for the property market until 2019”. Other experts said the impact of rising interest rates is not sufficient to lead to a broad-based slump in Hong Kong house prices.

Nigel Smith, a managing director at real estate services company Colliers International, said he expects “a brief cooling down period” but is not forecasting a downturn. “Interest rates are only one of the major factors impacting the Hong Kong property market.”

Emma Dunkley & Nicolle Liu

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