hot money

Taiwan just expanded its armoury against hot money: its financial regulator has apparently accepted a proposal from the central bank to accept only US dollars as cash collateral for bond borrowing. The move is intended to bar the use of bond borrowing as a means of speculating on Taiwan’s currency. There is no official confirmation (in English, at least) on the Financial Supervisory Commission or central bank websites but the news is widely reported from local sources. While addressing the Legislative Yuan’s Finance Committee, FSC chairman Chen Yuh-chang also voiced reservations about a more direct ‘hot money’ tax, saying it could dramatically affect domestic equities.

Singapore’s central bank surprised global markets by tightening monetary policy as the government announced a 20 per cent contraction in economic growth in the third quarter.

The Singapore dollar hit a new high of $1.2826 against the US dollar after the Monetary Authority of Singapore on Thursday said it had widened the currency’s secret trading band against a basket of currencies. The MAS said it had also “slightly” increased the pace at which it will allow the domestic currency to appreciate. Read more

Hot money? South Korea isn’t encouraging any more – the central bank on Thursday held its base rate at 2.25 per cent. The decision has surprised Reuters analysts who had expected a 25bp raise.

Bond prices have risen to record highs on the news and the won has also strengthened, though not as much as it would have done had interest rates risen. Read more

‘Unsustainable growth in credit’ has prompted the Peruvian central bank to raise its reserve requirements. Banks will need to hold funds equivalent to 75 per cent of borrowings abroad maturing in less than two years, up from 65 per cent, reports Bloomberg.

The economy shows some signs of overheating, with rising inflation and a strengthening currency that consistent recent forex interventions have slowed but not reversed (see chart; source). The Reserve bank has increased its reference rate steadily during 2010, the most recent rise taking the rate to 3 per cent.

Growing concern amongst Asian central bank governors about capital inflows, which have seen a number of countries embrace once-dreaded capital controls, appears to be spreading to Latin America. Chile’s unflappable central bank governor, José De Gregorio, today expressed his concern about the growing number of foreign investors piling money into emerging markets. He says it is time to keep an eye on capital inflows.

According to El Mercurio newspaper, this is what he had to say at a seminar:

Capital flows are worrying me . . . This is not yet a problem in the Chilean economy, but we have to remain relatively alert and thinking about what implications this will have for monetary policy.

High copper prices, global stock market gains and the expectation that Chile’s central bank will continue to raise rates regularly have helped push the peso currency higher – it recently touched a five-month high. It has eased a little today against the dollar, trading around 513 to the greenback.

If De Gregorio is concerned, Bertrand Delgado, a senior analyst at Roubini Global Economics, says he has a few options to manage dollar liquidity. Read more

Growing risk aversion among investors is slowing foreign capital flows to emerging markets such as India, potentially choking inflows needed to fund the nation’s widening current account deficit, India’s central bank said.

Duvvuri Subbarao, the governor of the RBI, told the FT that the expectations of the world’s senior economic policymakers about the volume of capital inflows in emerging markets had dramatically changed over the past three months. “Even three months ago, we were talking about a possible flood of capital flows,” he said. Read more

Rates have been lowered another 50bp in Iceland, justified by a rising krona and lower risk premia. Since the last MPC meeting, the krona has risen 5 per cent against the euro, “slightly more than assumed” by the central bank in its last forecast. Unlike last time, inflation is currently falling.

The central bank has also been repurchasing 2011 and 2012 euro-denominated bonds – €160m and €32m, respectively. The move is an effort to reduce reliance on external funding. Bilateral credit lines with Denmark, Finland, Norway, Poland and Sweden totalling €639m are being used to supplement the bank’s foreign exchange reserves.

On the subject of reserves, the bank explained:

Over time, the Central Bank will have to replace borrowed reserves with non-borrowed reserves. The appreciating króna and lower external risk premia could allow modest regular purchases of foreign currency. The timing and quantity of such purchases will be conducted so as to minimise the effect on the króna. No decisions on such purchases will be taken before the August MPC meeting.

 Read more

Having strengthened yesterday, the renminbi has opened sharply down against the dollar – indeed by the largest weakening since December 2008.

Market talk suggests Chinese state-owned banks bought dollars to save the central bank from having to intervene. If the currency is seen as a one-way bet, ‘hot money’ will likely flow into China – potentially interrupting monetary policy transmission and causing inflation. Read more

From Reuters:-

China’s foreign exchange regulator is considering cutting short-term foreign debt quotas for some commercial banks, three sources familiar with the situation said on Friday, as it seeks to curb speculation over yuan appreciation. Read more

The zloty is too high, even though recent intervention by the central bank has helped to weaken the currency to levels last seen a month ago. So says Polish deputy finance minister Ludwik Kotecki.

“At this stage of the recovery, the zloty is probably too strong and for sure further appreciation of the zloty should be avoided,” Mr Kotecki told Bloomberg in an interview on April 17 in Madrid. “The recovery is not well grounded and risks still exist. Too strong a zloty would be negative.” He declined to speculate on what the optimal exchange rate would be for Poland’s economy. Read more