FX Update: The HK Dollar Peg and US Economic Policy
Mellor, Neil, Global Finance
Outside of the United States, nowhere else is the impact of current Fed policy being felt more keenly than in Hong Kong. The Special Administrative Region's (SAR) currency board has demanded an ultraaccommodative monetary policy akin to that of the Fed and has shackled the HKD to the USD - a currency that has lost more than 10% of its value (on a trade weighted basis) since March and has recently neared all-time lows. The attractions of a fixed and therefore highly competitive currency and a market buoyed by ample liquidity are illustrated by custody data from BNY Mellon, which have shown a steady rise in foreign portfolio investment since the end of Ql . Over this period, the Hang Seng index has gained an incredible 85%.
This has created quite a challenge for the HKMA, the SAR's de facto central bank that has been obligated to defend the peg through repeated interventions on numerous occasions of late. In view of the HKMAs resolute commitment to the peg through various crises these past 26 years, speculators are always fighting the odds, yet it would be very surprising if fresh speculation of a nearer-term shift were not to arise. Longer-term forwards prices still see the HKMA capitulating at some point and certainly, on the basis of China's strengthening links with its southern financial hub, a long-term alignment with USD/CNY (possibly for the SARs ultimate adoption of the CNY) is entirely plausible. However, it is the HKMA's immediate problems that provide food for thought.
The HKMA has only a limited window in which to defend the peg before prices begin to rise. Signs of price distortions in the SAR are already beginning to emerge. …