HKMA USD/HKD Peg Under Pressure, Risking Severe Market Volatility

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Talking Points – HKMA, USD/HKD, HONG KONG DOLLAR

  • A rising US Dollar has positioned HKMA’s USD/HKD peg once more below stress
  • Hong Kong’s combination steadiness is poised to say no to 2008-lows very quickly
  • In the occasion of a de-peg, this consequence dangers stoking extreme market volatility

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Back in April 2018, fears of financial tightening from the Hong Kong Monetary Authority amidst a weaker HKD initially triggered a temporary bout of marketwide panic. Chinese shares declined and the sentiment-linked AustralianandNew Zealand Dollars fell. A few days later, the HKMA upheld efforts to keep up their forex peg. USD/HKD pulled again and shares within the Asia/Pacific area rejoiced.

Since then, a stronger US Dollar has been including stress to not simply its Hong Kong counterpart, however to others as properly. Broadly talking, you’ll be able to attribute this to persistent efforts from the Fed to boost rates of interest amidst a strengthening financial system. More lately (as of early August 2018), USD has been additional lifted by aggressive risk aversion amidst fears of Turkish contagion.

Thanks to the positive factors within the buck, attention has been refocused on the HKMA and their forex peg. This entity largely conducts financial coverage by sustaining the soundness of the Hong Kong Dollar. Back in 2005, it established a spread for USD/HKD to commerce in as a part of its “three refinements” to assist stabilize its forex.

This included a “strong-side convertibility undertaking” (CU) at HK$7.75/USD and a “weak-side CU” from 7.80-7.85. Looking on the chart beneath, you’ll be able to see that for many of this 12 months to this point, USD/HKD has been precariously hovering below the outer restrict (7.85). Simultaneously, we additionally had a spike within the three-month HIBOR lending fee which was its largest in a single day since April 2018.

USD/HKD Daily Chart with HIBOR, US Dollar

Chart created in TradingView

HIBOR is the Hong Kong Interbank Offered Rate, which is actually the benchmark rate of interest for lending between banks inside the autonomous territory. It is decided by the Hong Kong Association of Banks. It typically strikes in parallel with actions from the HKMA because it adjusts liquidity available in the market to assist stabilize its forex.

So what’s the cope with the latest spike in HIBOR then? Looking on the subsequent chart beneath, you’ll be able to see Hong Kong’s combination steadiness, which has been falling from over HK$400b again in 2015 to only a hair over HK$100b as of August 2018. This has additionally occurred concurrently with rising rates of interest within the US. The higher boundary of the federal funds fee stands at 2.00% as of this report. This is up from 0.25% in 2015.

HK Aggregate Balance and Fed Funds Rate

Essentially, the mixture steadiness is a part of Hong Kong’s financial base, which is made up of the sum of balances of banks’ clearing accounts. It varies relying on the circulation of funds out and in of the HKD. Lately, the HKMA has been spending it in an effort to uphold their forex. Projections are calling for it to fall below HK$100b, which might be the primary time since 2008.

In some methods, this has elevated fears that the financial authority gained’t be capable to maintain USD/HKD below 7.85. But on August 16th 2018, the HKMA as soon as once more reiterated efforts to keep up the peg, which improved market mood to a sure extent (much like what we noticed again in April). But indicators that the financial authority will proceed dealing with stress to stabilize its forex may maybe reignite aggressive danger aversion.

At the second, the Fed continues to be projected to proceed elevating charges by an extra two occasions in 2018. This would deliver complete will increase to 4 this 12 months. However, that fourth fee hike by the start of 2019 shouldn’t be absolutely priced in fairly but. In addition, commerce wars and Turkish fears were recently reignited. Both of those outcomes can have the potential to maintain the US Dollar appreciating within the near-term. This begs the query, what is going to the HKMA do?

BACKGROUND: A Brief History of Trade Wars, 1900-Present

FX Trading Resources

— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the feedback part beneath or @ddubrovskyFX on Twitter



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