07 Jan 2004 06:57 *TOP NEWS* Foreign exchange HONG KONG, Jan 7 (Reuters) - A flurry of interventions by Hong Kong's central bank did little to budge the local dollar from its recent range on Wednesday morning as foreign investors continued to pour money into the surging stock market. "Hot money is still coming in," said a dealer from a French bank. "I expect the Hong Kong dollar to stay on the high side, around the current levels, because the stock market is still strong," the dealer said. The Hong Kong dollar <HKD=> was trading at 7.7633/34 at 0314 GMT, compared with 7.7630/32 late on Tuesday. The benchmark Hang Seng share index, which has climbed for seven straight sessions, was up more than one percent. Foreign funds has been flowing into Hong Kong stock market, pushing market turnover to a near four-year high on Tuesday at HK$28.5 billion for the day. The Hong Kong dollar is pegged to the U.S. unit at 7.80, but has been under upward pressure since September on speculation about a revaluation of the Chinese yuan, brighter domestic economic prospects and capital inflows. "I think there are some forces speculating about further strengthening in Asian currencies amid the weakness in the U.S. dollar," said a dealer from a European bank. The Hong Kong Monetary Authority is obligated to defend the HKD from weakening below its HK$7.80 peg with the U.S. dollar but has no mandate to stop it from strengthening above that level. "As the HKMA interventions are transparent, people are testing the upper limit of the HK dollar. As the HKMA had intervened at about 7.7630, people now think that it will invariably be buying U.S. dollars around that level," the dealer said. The HKMA intervened three times on Wednesday morning, selling HK$4.27 billion and buying U.S. dollars in an effort to stabilise the local unit. It sold HK$505 million on Monday and HK$4.06 billion on Tuesday. The latest interventions will further boost the aggregate balance -- a key measure of interbank liquidity -- to a new high of HK$41.251 billion on Friday. However, the discount on Hong Kong dollar forwards deepened further and the interbank interest rates softened on rising interbank liquidity. The discount on one-year forwards <HKD1Y=> widened to 750/730 pips from Tuesday's 690/680 pips. Meanwhile, the one-year interbank rates eased to 0.43-0.48 percent, compared to 0.57-0.60 percent in the previous day. Traders predict further HKMA interventions in the near term as a number of Chinese firms will seek listings in Hong Kong that will attract more overseas funds. Hong Kong Chief Executive Tung Chee-hwa will deliver his annual policy address on Wednesday afternoon. He is expected to review the state of the territory's economic recovery and discuss plans to tackle its large fiscal deficit.
I think Japans interventions are effective to a large degree and have slowed the rise of the yen considerably. The budget for this purpose has been increased by some billions this year . But if the pressure is so great - as it looks to be - then the yen will continue to strengthen.
Trajan: Can you pls give us an oversimplified (one or two sentence) synopsis of that book as you understand what it is saying so far?
WinSum: Here is an article by the FBRSF. Here is a book called Currency Strategy: A Practitioner's Guide to Currency Trading, Hedging and Forecasting that does seem to talk about pegging. My understanding so far about pegging is: It is done as a means to counter excess speculation. Also done when devaluation is desired to adjust a country's currency to sustainable (read so a country doesn't completely implode). Though don't quote me on that...