Smart speculators could raise price tag to US$2b a day
Future Government intervention during a second round of currency attacks could rise above US$2 billion a day as speculators are now better prepared for action, according to a report by SocGen Asset Management Asia.
With the Hong Kong market's daily volume averaging $600 million even during low activity days and speculators not afraid to take on the authorities, the cost of intervention will be extremely high, the report said.
However, a SocGen analyst said a second round of intervention by the Government was unlikely.
'The Government was cornered by the crazy global environment and was forced to intervene,' said the analyst.
'But because it wasn't very successful, it will be reluctant to try again.' The report said the real cost of intervention would be the markets demand for a risk premium, as they view the Government's new managerial role with suspicion.
Over time SocGen said it expected the Government to successfully prove to investors that its actions were linked to maintaining the currency, rather than asset price stability.
'Once investors realise this, the increased risk premium will reduce,' it said.
SocGen's report said the jury was still out on the effectiveness of intervention, as the strategy was still new and there was no guarantee it would not make mistakes.
The report concluded that as the Government's intention was not to sustain or support the market, it could immediately reverse its position within a few weeks and benefit at the expense of speculators.
'In a worse case scenario,' it said, 'Government losses could be 10-20 per cent of investment unless it loses the battle of the peg defence, which is extremely unlikely.' Estimates have put the total cost of the Government's initial intervention at $15 billion, 15.5 per cent of Hong Kong's $96.5 billion reserves.