Capital flow uncertainty to increase, warns Chan

Top News | Bloomberg and Stella Zhai 21 Jun 2019

Hong Kong Monetary Authority chief executive Norman Chan Tak-Lam says uncertainty on future capital flows will increase and calls for carefully managing currency risks after the US Federal Reserve announced no change in the interest rate but forecast a cut by the end of the year.

The Fed maintained the interest rate in a range of 2.25 percent to 2.5 percent, but signaled it was ready to lower rates for the first time since 2008.

The Fed scrapped its use of the word "patient" in describing its approach to policy changes and forecast a larger miss of the 2 percent inflation target this year, roughly three months after bond markets began clamoring for lower borrowing costs.

Officials were starkly divided on the path for policy, with eight of 17 Fed officials forecasting a cut by the end of the year as the Federal Open Market Committee took note of greater economic uncertainties.

Treasuries led a global bond rally as expectations grow that major central banks will ease policy.

The US 10-year yield once dropped below 2 percent for the first time since November 2016, while Japan's benchmark yield dropped near the bottom of the central bank's targeted range.

The Fed's dovish shift in its monetary policy came after European Central Bank president Mario Draghi signaled he is ready to add monetary stimulus, offering support for bond bulls who argue that the US-China trade war will sap growth momentum.

Signals of lower rates also boost the appeal of noninterest-bearing assets like gold.

The metal once jumped to the highest in more than five years, almost reaching US$1,400 (HK$10,920) an ounce.

Holdings in gold-backed exchange-traded funds have increased for 12 of the last 14 days and key central banks are continuing to buy, with China increasing its reserves for a sixth straight month in May.

Goldman Sachs now expects the Fed to cut interest rates by 25 basis points in both July and September and is not ruling out the possibility of a bigger move of 50 basis points "if the news flow disappoints."

Chan adds that the Hong Kong Interbank Offered Rate will continue to be affected by factors such as the US dollar interest rate and the market's supply and demand for the Hong Kong dollar.

The Hongkong and Shanghai Banking Corp and BOC Hong Kong both announced keeping the best lending rate unchanged at 5.125 percent and the Hong Kong dollar deposit annual rate at 0.125 percent.

Hibor rallied overall. One-month Hibor rose 3.9 basis points to 2.472 percent. One-month or longer term Hong Kong dollar interbank borrowing costs are all higher than the corresponding US dollar borrowing cost.

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