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HKMA to Defend Hong Kong Dollar After Slide to Extreme of Currency Peg

Six consecutive weeks of losses for the Hong Kong dollar make it near-inevitable that the Hong Kong Monetary Authority will have to defend the currency’s peg at some point in the upcoming week.

The Hong Kong dollar, which has been restricted since 2005 to exchange rates between 7.75 and 7.85 per US dollar, weakened on Friday evening to a thirty-year low of 7.8495 before settling at 7.8454, just 0.06% from the currency’s minimum allowed level against the greenback.

The Hong Kong dollar has fallen in value in all but two months since December 2016 due to a widening of the US-Hong Kong interest rate differential. Despite the HKMA raising interest rates in step with the US Federal Reserve, rates paid on Hong Kong dollars have remained low over the past fifteen months due to abundant liquidity in Hong Kong’s financial system; meanwhile, rates paid on US dollars have risen steadily. When last seen, one-month US Libor rates stood at an 84-basis point premium over Hibor.

Small though it may be, this differential between US and Hong Kong interest rates allows institutional players to profit by borrowing large amounts of Hong Kong dollars for the purpose of investing them in US currency or assets which offer a greater return than loan repayments.

Holders of Hong Kong dollars will be relieved to know that there is unlikely to be a speculative attack on the USD/HKD peg, evident from implied volatilities in options markets, which remain low. This is due to Hong Kong’s sizeable foreign exchange reserves, which analysts say are more than enough to discourage speculation.  Reserves in excess of US$440 billion are among the world’s highest.

Against the Japanese yen, moving in step with the US dollar, the Hong Kong dollar slid last week to a sixteen-month low. A single Hong Kong dollar now buys 13.35 yen.

Against the euro, the Hong Kong dollar has held steady in recent weeks but remains nearly 20% down on early 2017 levels. The euro now fetches 9.7 Hong Kong dollars.

 

 
Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.
 
 

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