Why is HKD weakening?By Peter Rosenstreich
The Hong Kong dollar is falling against the US dollar, even though markets are comfortable with China’s outlook, Reasons we can rule out are positivity around the greenback, worries about Hong Kong’s domestic growth or a straight attack on the currency peg.
So what is it? Widening in LIBOR-HIBOR spreads suggest that this is a traditional interest rate arbitrage. Carry traders are buying USD for the yield, so selling HKD. The Hong Kong Monetary Authority has plenty of reserves to defend the peg, and automatic, self-adjusting interest rates should kick in at the upper range, where HKMA will switch to selling USD and buying HKD. This will lower liquidity and drive up HKD rates, discouraging carry traders.
New Zealand steadyBy Vincent-Frédéric Mivelaz
The Kiwi central bank, the Royal Bank of New Zealand, has agreed to implement a second mandate of maximum employment, alongside its first one of price stability. The mandate will be enshrined in law this year. NZ treasuries remain unchanged following the announcement, with 2-year and 10-year yields at 1.88% (+0.17) and 2.78% (+0.18).
New Zealand’s economy is showing signs of recovery. February’s trade balance came in at NZD 217 million or USD 157 million, its highest rate after a NZD 655 million deficit in January. On the downside, the 12-month trade balance remains at NZD -3 billion. Exports rose by NZD 4.46 billion (previous: NZD 4.31 billion) while imports increased by NZD 4.24 billion (previous: NZD 4.94 billion). In forex side, non-commercial long NZD futures positions increased by 19’626 (previous week: -2’816), which is 44% of total open interest contracts. This signals traders’ tendency to dump the greenback, which might continue if USD weakness sustains. We suspect the USD/NZD to head along the 1.37 range.