For much of 2017 it’s been one-way traffic in the market for Hong Kong dollars.
USD/HKD rose (the Hong Kong dollar fell) in fourteen of the seventeen weeks prior to July 7th, blowing through the midpoint of its allowed 7.75-7.85 range with ease.
The currency had, however, stabilized over much of the past month – a period in which USD/HKD meandered sideways between 7.8015 and 7.814.
That brief period of respite for holders of Hong Kong dollars is now over. Approaching Friday’s European session, the currency is on course to have its worst week in ten, having fallen yesterday to a nineteen-month low of 7.8195 against the US dollar and within a whisker of another significant milestone at 7.82.
There’s Too Much Cash in Hong Kong!
The underlying cause of Hong Kong dollar weakness – the interest rate premium held by the US over Hong Kong – shows no signs of being cured. The three-month US Libor rate, now 1.31%, remains around 55 basis points higher than the Hong Kong equivalent, Hibor. This rate differential, which at the start of 2017 barely existed, is now at its largest in nearly nine years.
The enormous liquidity that has been injected into Hong Kong’s economy in recent years via the global implementation of quantitative easing – which is still in use in Japan, the eurozone, Scandinavia and the UK – has worked to depress money market rates in Hong Kong even as the country’s central bank, the Hong Kong Monetary Authority (HKMA), has raised borrowing costs in step with the US Federal Reserve.
Simply, with an abundance of cash in Hong Kong’s economy, money market rates paid on the country’s currency have not grown at the same speed as those paid on US dollars, and this has prompted a sell-off in HKD.
Evidence for the deep liquidity in Hong Kong comes in the form of Knight Frank’s Prime International Residential Index, which in 2016 ranked Hong Kong as the most expensive city in the world to buy property. Knight Frank said that USD 1 million now buys a home in Hong Kong averaging just 20.6 square metres.
Fuelled by cheap money, Hong Kong’s housing boom shows no signs of slowing, with the country’s House Price Index up 20% over the last year.
In June, Hong Kong’s Financial Secretary, Paul Chan, expressed concern over a potential correction in the country’s housing market.
“We have to warn our people about the dangerous situation of the property market,” said Chan.
“No one can tell how deep the [housing market] adjustment will be or what is the appropriate level of adjustment. It is not up to the government to dictate, but I think it is important for people to recognize it is risky,” he added.
Such is the HKMA’s mandate, were the USD/HKD exchange rate to reach its upper limit of 7.85, the central bank would be forced to intervene in the market to stabilize the currency and, if need be, work to create a rapid rise in Hong Kong interest rates, which would not be good for borrowers.
Any move to strengthen the Hong Kong dollar would be a new challenge for the HKMA, who since the current trading band was set at 7.75-7.85 in 2005, have only ever had to intervene in FX markets during periods of excessive HKD strength.
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