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Enoch Yiu

The Hong Kong Monetary Authority needs to improve its foreign exchange trading strategies after racking up a grand total of HK$85.9 billion in forex losses over the past 15 months.
Cutting exposure to the yen, euro and pound and using hedging tools are among the investment advice offered by currency traders.
“The HKMA could be a better currency trader if it could adjust its currency mix in the near future,” said Jasper Lo Cho-yan, marketing director of Tung Shing Futures.
He said the HKMA had to reduce its exposure to the yen, pound and euro.
“The US dollar is going to continue to remain strong, as the yen will continue to be weakened by the country’s monetary easing policy,” Lo said. “The British pound will be haunted by political uncertainty. The euro may have hit a three-month high on Thursday but the longer-term view remains weak due to its monetary easing policy.”
On Monday, the city’s Exchange Fund reported a 40 per cent year-on-year fall in net income to HK$6.6 billion for the first quarter due to heavy foreign exchange losses of HK$33.2 billion that offset gains from stocks and bonds.
That followed a forex loss of HK$52.7 billion last year that led to the Exchange Fund recording its fourth worst year in terms of investment performance since the HKMA was set up in 1993.
HKMA chief executive Norman Chan Tak-lam admitted to lawmakers on Monday that improvement was needed in the way the HKMA invests the HK$3.22 trillion local reserve in stocks, bonds, property and currencies.
“We will adjust the investment mix,” he said. “However, we could not cut off all non-US dollar assets as we have to keep a diversified portfolio.”
Brett McGonegal, chief executive of financial services firm Reorient Group, said there was no excuse if the Exchange Fund forex losses were coming from the euro or yen.
“Currency moves are often very pronounced and tend to be quite one directional,” he said. “Take a look at the US dollar, euro and yen over the past year, the charts speak for themselves.”
He said appropriate hedging was needed, adding: “If a sovereign fund is making outsized regional bets without hedging the currency then someone needs to take a second look.”
Heng Koon-how, senior foreign exchange strategist at Credit Suisse private banking and wealth management, said the HKMA faced the same challenges as other central banks.
“It is quite common to see central banks recording valuation losses in a strong US dollar environment, given that more than one third of the average central bank balance sheet is denominated in currencies other than US dollar,” Heng said. “The balance sheet will suffer a foreign exchange loss when translated back into US dollars.”
“Quite a few central banks reported such FX related losses for the latest quarter. The HKMA is of course no exception. This situation is likely to reverse when the US dollar weakens.”
The HKMA does not release a breakdown of its currency holdings. Heng said the latest Composition of Foreign Exchange Reserves (COFER) report by the IMF in October showed that the average composition of a global central bank’s balance sheet comprised about 62 per cent in US dollars, followed by 23 per cent in euros, and under 4 per cent each in the pound and yen, with the remainder in other currencies.
“If we assume that the Exchange Fund’s FX composition is similar to the IMF’s COFER average, then it is possible for the Exchange Fund to suffer FX related losses,” Heng said.
 
enoch.yiu@scmp.com
 
 


Hong Kong Monetary Authority racks up HK$85.9 billion in forex losses over 15 months

Hong Kong Monetary Authority officials pose beneath the 150th anniversary bank note. The territory's de facto central bank posted huge forex losses and needs to switch strategy, currency traders said. Photo: May Tse 

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Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


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Portfolio

.css-1m2rp1p{color:#34b8b5;}Portfolio | Hong Kong Monetary Authority racks up HK$85.9 billion in forex losses over 15 months

Portfolio | Hong Kong Monetary Authority racks up HK$85.9 billion in forex losses over 15 months