Hong Kong Dollar General Info
Representing a little less than 2% of the foreign exchange market’s daily turnover, the Hong Kong dollar is the world’s thirteenth most traded currency. It is subdivided into 100 cents.
The Hong Kong dollar has been pegged to the US dollar since 1983 and the USD/HKD exchange rate has been limited to a range of 7.75 to 7.85 since 2005. The Hong Kong dollar’s peg is backed by one of the world's largest foreign exchange reserves (Hong Kong’s official reserves in 2016 were worth US$360 billion).
Hong Kong dollars are issued by the country’s government, but also by three local banks – HSBC, Standard Chartered and Bank of China – providing those banks have on deposit the US dollar equivalent of what they print.
The Hong Kong dollar reached an all-time low against the US dollar in September 1983 when USD/HKD reached 9.6 (HKD/USD 0.104), and its all-time high came in March 1978 when USD/HKD traded at just 4.6 (HKD/USD 0.217).
HKD - Market View
In early-July, the USD/HKD exchange rate was holding a little above 7.81.
The Hong Kong dollar had fallen steeply throughout 2017, declining in value in fourteen of the seventeen weeks prior to July 7th, and had reached an eighteen-month low against USD in the first week of July when USD/HKD rose as high as 7.814.
Hong Kong dollar weakness continues to be driven by the ever-widening gap between local and US interest rates. At the start of 2017, three-month Hibor (Hong Kong rates) and three-month Libor (US rates) stood at similar levels, but by the end of June Libor held a 52 basis point premium over Hibor, which of course had driven funds out of Hong Kong dollar deposits and into the higher-yielding US dollar.
Looking forward, the Libor-over-Hibor differential must necessarily decrease at some point if the Hong Kong dollar is to remain pegged to its US counterpart. The USD/HKD exchange rate, which has been restricted by the Hong Kong Monetary Authority to a range of 7.75 to 7.85 since 2005, would simply rally to the high of its allowed range and beyond if rate differentials were allowed to continue to widen in favour of the US curency.
Higher rates in Hong Kong will pose significant economic and political burdens since the country remains the world’s most expensive city for property according to many gauges. Since the majority of mortgages in Hong Kong remain pegged to Hibor, an increase in the rate will hit borrowers immediately and head-on.
In June, Hong Kong’s Financial Secretary, Paul Chan, expressed concern about the “dangerous situation” in the country’s housing market.
In early July, against the euro and Australian dollar, the Hong Kong dollar remained just shy of the major technical levels of 9.0 and 6.0 respectively.