Thursday July 7, 2005 - 11:21:30 GMT
Share This Story
Black Swan Capital - www.blackswantrading.com
Hot money is a double-edged sword
“As US interest rates continue to rise and the dollar strengthens, the hot money that flowed into Asia on the back of Rmb revaluation may have started to leave. I estimate the total amount of hot money at around US$700 billion. Such a reversal could have a major impact on Asian asset prices.”
Andy Xie, Morgan Stanley
$700 billion in hot money sitting in Asia, according to estimates by Morgan’s Andy Xie—that’s a big chunk of change! Much of that money flow was due to the expectation of “pending” revaluation of the yuan. And why not snap up some hot real estate, while waiting for the “pending” revaluation of the yuan. So, it can be assumed that much of the Shanghai property boom is part and parcel to revaluation—at least we are making that assumption.
So, imagine what happens when said “hot money” has its expectations squashed should it perceive two potentialities: a) The yuan revaluation is NOT “pending”, and 2) China IS slowing.
Short answer: Much of the $700 billion flows back out of Asia.
If you remember, in Tuesday’s piece—we reviewed Soros’ reflexivity theory, and how it relates to currencies: “Speculative capital moves in search of the highest total return. Total return has three elements: the interest differential, the exchange rate differential, and the capital appreciation in local currency,” according to Soros. And in that arrangement, the expectation of a rising exchange rate manifests itself as the key driver of “hot money.”
As “hot money” leaves any region, it usually trickles out at first. Those who recognize early trends, get on the bus. They aren’t likely to share their views until safely out of danger. But sooner or later, this trickle morphs into a flood—taking on a self-feeding quality and a seemingly sharp swing in sentiment—it is the nature of the market—human nature. Fear is a bigger motivator than greed. We have seen this before.
Could it be déjà vu all over again? “The amount of hot money in Asia is about three times the liquidity that left the region in 1998. The potential for another Asian liquidity crisis clearly exists,” says Mr. Xie.
Black Swan Capital
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."