Hong Kong Dollar, Hang Seng, Hong Kong Monetary Authority, FX Intervention – Talking Points:
- The Hong Kong Dollar has gained as US interest rates have fallen
- However that’s a problem for local authorities with a currency peg to defend
- Investors need to bear this in mind as the coronavirus story endures
Investors all over the world may have cheered the massive stimulus programs put in place to combat the economic drag of coronavirus, but they’ve caused some headaches for emerging markets, with Hong Kong a case in point,
Lower US interest rates have increased the charms of the Hong Kong Dollar, already a market darling thanks to Chinese investors’ fondness for the local stock market, the Hang Seng. Higher rates at the city’s banks have attracted inflows as US borrowing costs have fallen back to zero, pushing the Hong Kong Dollar to the top of its permitted trading range against the greenback.
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The Hong Kong Monetary Authority is the territory’s de facto central bank. It stepped in on Tuesday to rein in the local currency in the first such action for more than a year. The HKMA sold HKD1.55 billion (US$200 million) to bring the exchange rate back within its trading band. The local currency has been pegged at 7.8 to the US Dollar since 1983, with USD/HKD floating in a band between 7.75 and 7.85 since 2005.
While a strong currency is not intuitively the worst problem any jurisdiction could have, it brings headaches. Locally produced goods become more expensive to foreign buyers, with the attendant risk that cheaper imported products will see inflation undershoot.
Traders and investors need to be wary of authorities’ need to defend their currency pegs in these times of heightened uncertainty and to be aware that they will do so with some vigor.
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— Written by David Cottle, DailyFX Research
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