Hong Kong dollar likely come under additional pressure this week

The battle between currency speculators and Hong Kong Monetary Authority will remain in focus this week amid a gloomy market sentiment worldwide.

The Hong Kong dollar lost 0.01 per cent last week and is down 0.55 per in the first three trading weeks of the year. The currency, touched an eight-year low of 7.8294 on Wednesday before heavy buying helped pushed the currency back up on Thursday and Friday. Analysts said the currency was under pressure amid concerns about capital outflow, the slowing economy and speculation authorities may abandon the peg to the US dollar.

“It is obviously that full confidence in peg has changed amid the weak stock market sentiment. There were some speculators attempting to push the currency to the weak end of the peg last week. These kind of trades may continue in the week ahead,” said Jasper Lo Cho-yan, director of Tung Shing Futures.

The Hong Kong dollar 12-month futures traded at 7.89 last Wednesday, the weakest since 1999 and beyond the 7.85 upper bound of the peg, which has ignited concerns whether the currency peg would remain in place.

Under the linked currency system, introduced in 1983, the Hong Kong dollar maintains a target of 7.8 per US dollar. The HKMA will use its HK$3.429 trillion Exchange Fund to intervene whenever the currency trades at the strong end of 7.75 or at the weak end of 7.85.

Since 2009, the HKMA has intervened many times to prevent the currency from being too strong due to the US monetary easing policy. An estimated US$237 billion in net capital inflows have entered Hong Kong since 2005, according to Daiwa. However, the US interest rate rise in December has widened the interest rate gap between Hong Kong and the US, triggering capital outflows which started at the beginning of the year and led to the sharp fall of Hong Kong dollar in the past two weeks.

Credit Suisse senior currency strategist Heng Koon How however believes the battle has ended.