Central banks on the defensive
Currencies continue to face downward pressure from S. Africa to China
PETALING JAYA: Central banks in Asia from at least two countries - Hong Kong and Indonesia - have intervened to stabilise their currencies following the plunge in the Turkish lira.
Asia’s two largest economies - China and India - also saw their currencies depreciate as concerns mount on the combination of the strengthening dollar and global trade wars, leading to emerging-market currencies coming under pressure.
Over the last week, the Turkish lira has depreciated by more than 18% after the United States imposed tariffs on its steel products.
Although the arrest of a pastor accused of collaborating to overthrow the Turkish government is said to be the reason for the US to act, it is widely believed that the move by President Donald Trump is to send a warning to the government.
Nevertheless, the combination of the lira crisis and the strengthening of the US dollar has led to emerging-market currencies coming under pressure.
From South Africa to China, the currencies are on a decline, with central banks being forced to intervene to support their currencies.
The Hong Kong Monetary Authority (HKMA) announced that it had sold US$275mil worth of its reserves to buy HK$2.2bil.
This is the first time since May that it had decided to defend its currency peg of between HK$7.75 and HK$7.85 to the US dollar.
“I don’t think this (the intervention by HKMA) will end just yet and it will likely continue for a while longer in Hong Kong, where the currency is trading near the peg range,” Maybank Research’s Singapore-based senior foreign exchange (forex) strategist Christopher Wong said when contacted.
Analysts said that countries that have large current account deficits and which rely heavily on external borrowings are the hardest hit in this round of selling by traders.
Wong said that the flight to quality or the
rush to safe havens has already been happening, and that this was affecting sentiment on Asian emerging-market currencies.
“It’s a double whammy and I believe Asian currencies are likely to stay soft in the near term,” Wong said.
It was reported by Bloomberg that the Indonesian central bank had also intervened even prior to the Turkish lira crash to curb the decline in the Indonesian rupiah, which has been one of the worst-performing currencies in Asia.
The wire report also quoted a monetary official as saying that the Indonesian central bank had inter- vened in both the forex and bond markets to stabilise the rupiah in the face of the crisis in Turkey.
The Indonesian central bank had also hiked up rates, raising its benchmark interest rate for the fourth time since May to prevent a further slide in its currency.
The central bank in Indonesia has already raised rates by a total of 1.25 percentage points in the past three months to 5.25% now.
The ringgit, notably, continued to be stable albeit still being on a downtrend in the face of such circumstances.
It ended lower by 0.20% to the dollar yesterday at 4.1040 in the forex market.
On Tuesday, Fitch Rating issued a report to state that it was affirm- ing Malaysia’s rating at A- with a stable outlook.
It noted that Malaysia’s ratings are supported by solid economic growth and a net external creditor position built up from a record of current-account surpluses.
“These strengths are offset by elevated government and private-sector debt, and low per capita income and World Bank governance scores relative to rating peers,” Fitch said in its report.
Sentiment in Turkey seems to be recovering at present, with the lira rallying sharply by some 6% to below 6.0 to the dollar at one point yesterday.
Wire reports said that Turkey’s banking regulator adjusted its rules pertaining to currency swaps and other similar transactions such as forex forward dealing to prevent traders from manipulating the currency.
The lira has lost almost 40% of its value this year and had crashed to a historical low of 7.24 to the US dollar at the beginning of this week.
“Concerns in Turkey are not just an overnight thing. Concerns there have been building up over the past months from the end of 2017 leading up to today.
“The country is facing challenging issues not just economically but on the political front as well. With twin deficits and other issues like the external debt to gross domestic product, it is vulnerable to speculation,” Wong said.