Hong Kong dollar could be re-pegged, say traders

Recent intervention by the Hong Kong Monetary Authority to stem the strength of the Hong Kong dollar has prompted speculation the currency could be re-pegged

The recent strength of the Hong Kong dollar, which has tested the outer limits of the USD/HKD currency peg, has led to speculation that the currency could be revalued, or even re-pegged to an alternative currency such as Chinese renminbi.

USD/HKD, which is bound by the currency peg to trade between 7.75 and 7.85, has come under continued pressure as investors have been attracted to the Hong Kong dollar, forcing the Hong Kong Monetary Authority (HKMA) to intervene twice in the past week, buying $1.85 billion (HK$14.4 billion) between October 20 and October 24 to defend the limits of the currency peg.

“The peg has been in place for 29 years. My view is that if there is some sort of re-pegging, the Hong Kong dollar would be trading stronger given its foreign exchange undervaluation. Indeed, it could move down by around 10% if it is allowed to float. The market is underappreciating this scenario at the moment,” says Barney Singer, head of emerging markets FX trading at Nomura in London.

USD/HKD was trading at 7.7498 earlier today, according to data from Thomson Reuters – well below the HKMA’s specified band. Some suggest the peg to the US dollar could be scrapped should the Hong Kong Special Administrative Region (Sar) gain a seat in the National People’s Congress (NPC). China’s legislative house will announce new members on November 8 and market participants believe a Sar seat could signal a change to the peg’s future.

“There is talk that the Sar might get its own seat on the NPC from now on and that could elevate the Sar’s status, putting the peg in question. With that in mind, 0.80 might be a line in the sand for the HKD/CNY cross, which has recently fallen to 0.8062,” says Woon Khien Chia, head of local markets strategy for emerging Asia at Royal Bank of Scotland in Singapore.

Singer agrees: “The NPC elections in China take place on November 8 and it is conceivable Hong Kong may get a seat. That would be a big development and the market is not really pricing this in. If this happens, then one can build the case that a change to the peg will happen sooner than what the market is currently pricing in.”

In the meantime, the HKMA expects inflows into the Hong Kong dollar to continue, given current monetary policy in the US and Europe, and stands ready to further defend the limits of the existing currency peg.

“Since the US Federal Reserve’s launch of the third round of quantitative easing, demand for Hong Kong dollar has increased, and similar rises are also noted in other currencies within the region. We expect net inflows into the Hong Kong dollar will continue for some time. We will monitor the situation closely and maintain the stability of the Hong Kong dollar in accordance with the Currency Board mechanism,” the authority said in a statement earlier this week.

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