On Wednesday, a single explosive hour formed the basis of what became the Hong Kong dollar’s best day since February 2016.
A little after 6am in London and 1pm in Hong Kong, the Hong Kong dollar suddenly took off, forcing USD/HKD down from levels around 7.826 to 7.8116. And while a 0.18% move might seem negligible when compared to those common in other markets, such moves are rare in USD/HKD due to the manner in which Hong Kong’s currency is pegged to its American counterpart. Since 2005, the USD/HKD exchange rate has been limited by Hong Kong’s central bank, the Hong Kong Monetary Authority (HKMA), to a range of 7.75 to 7.85.
The HKMA was the catalyst for Wednesday’s surprise rally after announcing plans to sell an increased amount of Exchange Fund Bills – a form of unsecured government debt paid for from the Exchange Fund.
While the HKMA later denied that the sales had anything to do with current HKD exchange rates, analysts are speculating that today’s decision is in fact a ploy to shrink the money supply and consequently boost money market rates paid on Hong Kong dollars. These rates have remained depressed even as the HKMA have raised borrowing costs this year in step with the US Federal Reserve.
Holders of Hong Kong dollars will be desperate to see the US Libor-over-Hibor rate premium reduce from its current level close to 55 basis points – the premium being the principal reason for the Hong Kong dollar’s decline this year.
Hong Kong’s currency nonetheless remains weak and close to long-term lows having fallen in every month of this year against the US dollar and in all but one month against the euro. The Hong Kong dollar remains second only to the Philippine peso in the unfortunate race to be Asia’s worst performing currency of the year.
RBNZ to Stay on Hold Until 2019
In other news, at this morning’s meeting of the Reserve Bank of New Zealand (RBNZ), bank governor Graham Wheeler once again said that “monetary policy will remain accommodative for a considerable period” and maintained previous interest rate forecasts which show no hike in New Zealand rates until the third quarter of 2019. The cash rate was, of course, left unchanged at its record low of 1.75%.
The RBNZ remains cautious on inflation, which has slowed markedly in recent months.
Data released in mid-July for the second quarter showed no increase (0.0%) in New Zealand’s consumer price index and a fall in the index of 0.1% after seasonal adjustment. The second quarter number stood in stark contrast to growth in the first quarter of 1.0%.
Earlier this week, the RBNZ also released the results of its latest survey of inflation expectations which showed that business managers were more pessimistic about inflation than they had been three months ago.
Decision makers at the bank are also less than thrilled about recent movements in the New Zealand dollar, which has gained more than 5% against the US dollar this year.
“A lower New Zealand dollar is needed to increase inflation and help deliver more balanced growth,” said Governor Wheeler at today’s meeting.
The New Zealand dollar fell steadily in the hours following the RBNZ announcements. At 05:30 GMT on Thursday, the NZD/USD exchange rate stood at 0.7266.
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