Hong Kong: Dollar peg slips to weakest in 19 months – 2 Aug 2017

  • The Hong Kong dollar has fallen to HKD7.8171 against the greenback, its weakest level since the China-inspired turmoil of Jan 16 as abundant liquidity continues to create a widening interest rate gap with the US.
  • The Hong Kong dollar is one of only two Asian currencies to lose ground against the weakening dollar in 2017. It is down 0.8%, while the Philippine peso is 1.3% weaker.
  • The Hong Kong currency’s steady slide is attracting the attention of analysts who suggest it could at some point breach the lower end of its permitted HKD7.75 to HKD7.85 trading band – which would force the Hong Kong Monetary Authority to support the currency and potentially produce a sharp rise in interest rates.
  • Since the current peg regime was set in 2005, the HKMA has only had to intervene at the strong side of the band when the currency was lifted by inflows during periods of financial stress elsewhere, or to cope with international demand for Hong Kong dollars during some of the city’s record-setting initial public offerings.
  • Hong Kong has more recently benefited from inflows produced by central banks’ unprecedented quantitative easing following the financial crisis as well as inflows from China. While both sources of funds have tailed off recently, the cash already in the Hong Kong banking system has helped suppress money market borrowing costs, meaning that even as the HKMA has followed the US in raising interest rates, the city’s money market rates have not kept pace. Benchmark three-month US Libor, or the London Interbank Offered Rate, is at 1.31% while its Hibor equivalent is at just 0.763%, the widest gap since the collapse of Lehman Brothers in Sep 08.
  • Hong Kong’s currency peg mandates the HKMA to use its reserves to buy the currency if it hits the weaker end of the trading band and it could potentially act before that point is reached.

External Link : https://www.ft.com/content/8445b084-775f-11e7-90c0-90a9d1bc9691