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SECRET
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13 JUL 1984
DESK OFFICLY INDSK
EMER 100/3
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SECRET
DEDI P
FM HONG KONG 13095OZ JUL 84
TO IMMEDIATE FCO
TELEGRAM NUMBER 1929 OF 13 JULY
HONG KONG DOLLAR.
RA
"Brs/7
1. SINCE MY TELNO 1884 OF 10.7.84 THE EXCHANGE RATE HAS WEAKENED FURTHER ALTHOUGH THERE HAS ONLY BEEN A SMALL DECLINE IN THE TRADE WEIGHTED INDEX. THE EXCHANGE RATE HAS DECLINED FROM 7.8430 TO 7.8670. THIS IS A VERY DISAPPOINTING OUTCOME GIVEN THE PERSISTENCE OF AN EXTERMELY TIGHT MONEY MARKET WITH OVERNIGHT RATES IN THE
RANGE OF 30 TO 40 PERCENT THROUGHOUT THE WEEK. MOST OF THE PRESSURE
ON THE MONEY MARKET RESULTS FROM EXCHANGE FUND OPERATIONS WHICH ARE PROVING QUITE COSTLY. AS THE WEEK PROGRESSED THE PERIOD RATES IN THE MONEY MARKET FIRMED UP SUBSTANTIALLY, WITH THE 3-MONTH RATE NOW AT 25 PERCENT. SOME NOTE ISSUE ARBITRAGE OPERATIONS ARE TAKING
PLACE AND THIS IS, OF COURSE, PUTTING PRESSURE ON THE FOREIGN
CURRENCY POSITIONS OF THOSE BANKS WHO ARE NET PROVIDERS OF NOTES.
THE BANK OF CHINA WHICH IS A NET TAKER OF NOTES WILL BE BENEFITTING
FROM THESE TRANSACTIONS AS THE RESULT OF HAVING A SUPPLY OF USD
AT 7.80.
2. THE FACTORS AFFECTING THE EXCHANGE RATE ARE THE PERSISTENT
STRENGTH OF THE USD AGAINST ALL CURRENCIES, HEAVING TRADING DEMAND
FOR GOLD IN THE BELIEF THAT THE NEXT PRICE MOVEMENT WILL BE UPWARD,
AND, PREDOMINANTLY PERHAPS, CONTINUING POLITICAL ANXIETIES
INCLUDING ADVERSE SPECULATION ABOUT THE REAL PURPOSE OF MR LUCE'S
VISIT. IN CONNECTION WITH THE EXCHANGE RATE, DOUBTS HAVE BEEN
RAISED ABOUT THE HONG KONG DOLLAR BEING ABLE TO MAINTAIN ITS 7.80
LINK WHILE ALL OTHER CURRENCIES ARE LOSING VALUE. THERE ARE
ALSO DOUBTS EMERGING AS TO THE EFFICACY OF THE LINKED SYSTEM ITSELF,
AT WHATEVER RATE.
3. YOU SHOULD NOTE THAT THE MARKET TECHNICALITY WHEREBY, BECAUSE
OF THE VERY WIDE INTEREST DIFFERENTIAL IN FAVOUR OF THE HONG KONG
DOLLAR, THE QUOTED EXCHANGE RATE TENDS TO WEAKEN AS TRADING FOR
VALUE TODAY ENDS AND THAT FOR VALUE TOMORROW (OR, IN TODAY'S CONTEXT, VALUE AFTER THE WEEKEND) COMMENCES. TODAY, FOR EXAMPLE,
THIS ACCOUNTED FOR A LOSS OF ABOUT 1 AND A HALF CENTS IN THE EXCHANGE
RATE AT ONE POINT IN THE AFTERNOON. ALTHOUGH THIS IS A TECHNALITY
IT IS DIFFICULT FOR THE PUBLIC NOT TO INTERPRET IT AS GROUND LOST.
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