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Strong USD upside attracts Hong Kong investors
Hedging solutions and currency risk management are a must
Bayani S Cruz 1 Mar 2015

The strong upside for the US dollar in the long term, backed by a solid consensus among market analysts, is expected to trigger demand for more currency hedging solutions from Hong Kong investors putting their money in overseas equities and fixed income assets.

“Hedging solutions and currency risk management in general have become very important. It’s something that people haven’t been giving a thought about in the past 10 years. But whether investing in Europe or Japan today, currency hedging is almost a must. It’s very important for Hong Kong dollar based investors,” says Tai Hui, chief market strategist, Asia, of J.P. Morgan Asset Management. The Hong Kong dollar is pegged to the US dollar.

The USD is up 5% so far in 2015 after rising by 13% in 2014, a trend that has been sustained in the past four years.

“The question is whether the US dollar has gone too far in too short a period of time and therefore prone to correction. I think it is probably over-bought but it’s not overvalued. It has risen 80% since June 2014, so no doubt it’s gone up very fast. But if you compare that to the dollar index during its peak in 2002, we’re still 25% below,” Hui comments.

He adds that with the US economy currently doing a lot better than other developed market economies, this means the tolerance for a strong currency will not be infinite but it will be acceptable.

“I think the US dollar is likely to strengthen in the longer term but don’t be surprised if you see a bit of consolidation in the short term. It could be triggered by some form of a reasonably satisfactory – not a conclusion -- resolution of Greece. That might give the euro a little boost. Or if the US Fed decided to delay the interest rate hike, it may give the dollar a little kick,” Hui says.

For non-US dollar based Asian investors, such as those from Singapore and Southeast Asia, having a US dollar exposure at this point is important in terms of potentially providing extra yield.

“India is a great example where Indian equity markets are in a fantastic rebound. But if you put money into US equity last year on a rupee basis, you could easily get mid-teens if not highteens,” Hui says.

 

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