Asia feels unintended consequences of QE3

The Hong Kong Monetary Authority has again intervened in order to preserve the dollar peg within its target range. Hong Kong’s central bank purchased a combined US$1.25bn at a rate of HK$7.75 in order to stop its currency appreciating. The flood of funds back into Hong Kong, as investors seek to diversify outside of dollars, is causing major headaches.

Last night’s intervention was the second attempt in as many days and marks the first such intervention since the financial crisis gripped world markets in 2009. Cheap US money is causing inflation in Asian economies and the need to adjust interest rates is attracting funds. The unintended consequences of unlimited asset purchases and record low rates are starting to cause imbalances in Asia and risky assets are likely to be the main beneficiaries.

Australia’s official rate of inflation also caught the market by surprise today. The trimmed mean gauge of core prices added 0.7% from the prior quarter which was higher than the 0.6% expected. We have already argued our case for a February rate cut as opposed to November. There is some one off factors like the introduction of the carbon tax but that was already expected to inflate the number anyways. The fact that the Australian economy has maintained its rate of inflation is consistent with its regional partners.

Today’s HSBC Chinese flash PMI of 49.1 shows an ongoing improvement but the market needs to see better numbers before getting excited about a potential turnaround. The number implies the Chinese economy is at its best level in three months but the prior reads are coming off a very low base. A number below 50 implies the economy is still in contraction mode so the market needs to see a print well above 50, perhaps we will see that in November or December given recent anecdotal data around Chinese trade, the price of coal/iron ore and copper plus a slight improvement in corporate earnings.