Hong Kong’s currency strengthened to the limit of its trading band for the first time since 2016, increasing the likelihood of intervention by the city’s de facto central bank.
To defend the peg, which allows the city’s currency to move in a narrow range of 7.75 to 7.85 against the greenback, the Hong Kong Monetary Authority has sold the equivalent of $760 million of its currency so far this week. That’s the first case of intervention on the strong side of the band since 2015.
The Hong Kong dollar is pegged to the U.S. dollar in a band that ranges between 7.75 and 7.85 to the U.S. dollar. In turn, the Macau pataca is fixed to the Hong Kong dollar at an exchange rate of 1.03. As the Hong Kong dollar is pegged to the greenback, both special administrative regions essentially import U.S. monetary policy, even if local rates don’t always track those across the Pacific.
Appreciation in the city’s currency is a reflection of a widening gap between local borrowing costs and those in the U.S., rather than investor confidence in Hong Kong’s outlook. The interest rate spread makes the local currency more appealing to hold versus the greenback, and is the reverse of the situation that prevailed in recent years.
“We may see the currency pair frequently touching 7.75 in the coming sessions to trigger intervention,” said Carie Li, an economist at OCBC Wing Hang Bank Ltd. Local interest rates will fall, she added, predicting the one-month tenor will likely slide toward 1% after the end of April from the current 1.59%.
The currency will likely stay close to 7.75 throughout the second quarter, said Stephen Chiu, an foreign-exchange and rates strategist at Bloomberg Intelligence.
Hong Kong has suffered a double blow of economic disruptions from widespread anti-government protests last year and the coronavirus pandemic in 2020. Fitch Ratings on Monday downgraded Hong Kong’s long-term, foreign currency debt to AA- from AA, with a stable outlook. The ratings agency said the city’s real gross domestic product is expected to fall by 5% this year after a 1.2% decline in 2019. DB/Bloomberg
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