HKD falls to weakest level in 19 months

After seven months of almost uninterrupted decline, the Hong Kong dollar has fallen to its weakest level against the U.S. dollar since January 2016.

During yesterday’s trading, it broke the HKD7.814 ceiling, rising as high as HKD7.817 against the USD.

The last time the HKD was this weak was in January 2016, when it reached a peak of HKD7.8296 against the dollar.

The currency in the semi-autonomous territory is pegged to the U.S. dollar between a trading band of HKD7.75 to HKD7.85. However, its recent weakness has some analysts speculating it could break out of the band, prompting immediate action from the Hong Kong Monetary Authority (HKMA).

The Macau pataca is fixed against the HKD at a rate of MOP1.032. Local authorities are obliged to issue and redeem the currency against the HKD at this specific rate.

In order to keep within the set band, the HKMA normally tracks the U.S. base rate, which, prior to several increases this year, had been held at 0.5 percent since the 2008 financial crash.

Contrary to expectations, the HKMA has held interest rates low due to abundant liquidity from the mainland. Macau authorities have followed suit.

The HKMA is empowered to use its considerable reserves to buy up the HKD in order to feed strength into the currency. This may become a necessity should the currency appear to be breaking out of its pegged band.

The Financial Times says that “the ability of the city to defend its peg is not currently in doubt,” however, there is a fear “that any action will drain liquidity and sharply raise borrowing costs in the territory.”

Meanwhile, against the RMB, the HKD is tracking at its lowest point since October 2016, moving against an upward trend that began in 2014. DB