The View

Here’s how to play the strong HK dollar if your kids are studying abroad

Hong Kong’s US dollar linked currency is better than gold. But have we peaked against the Australian or Canadian currencies?

PUBLISHED : Monday, 22 February, 2016, 10:02am
UPDATED : Monday, 22 February, 2016, 10:02am

Many families in Hong Kong send their children abroad for school, and, as a result, expose their household financial positions to substantial foreign exchange risk. The wind is currently at our backs, as the link to a strengthening US dollar has increased Hong Kong’s purchasing power in countries such as the United Kingdom, Canada and Australia.

Yet there is a question of how long these beneficial terms of trade will last. Should Hong Kong households with younger kids, for example, be loading up on certain foreign currencies now, in case the terms are not so attractive when their little scholars finally head off to boarding school or university? Or will Murphy’s Law ensure that if they do take such precautions, the markets will inevitably move against them?

The Australian dollar has fallen by about a third from recent year peaks, so seems cheap

This is a personal question for me. I have a teenaged daughter who is half-Australian, and very impressed with the country’s higher-education credentials (i.e., the beaches). The Australian dollar has fallen by about a third from recent year peaks, so seems cheap. Will it still be “cheap” in two years?

Aye, it may get cheaper. “The China-driven commodity cycle is over; further weakness in commodities is not a reason to own them,” JPMorgan said in its 2016 outlook. As such, the bank remains bearish on many commodity-linked currencies, and seems to have a particular bias against the Aussie. “Our current preferred implementation for 2016 is Australian dollar shorts,” the report said.

Predicting Australian dollar movements is notoriously tricky, however. If looked at rationally this is a country that should be in some Mad Max post-bubble apocalypse, hunting kangaroos for dinner, and too debt-burdened even to afford sunblock. Instead, the country’s has simply exchanged a commodities bubble for one in property. Interest rates are unlikely to go lower; the next move might even be up. As someone who may have to make large outlays in Australia’s foreign exchange market in future, it is tempting to wade in now, purchasing the equivalent of at least one or two terms worth of tuition costs.

Those with plans to study in Canada might have even more motivation to take pre-emptive action in the forex arena. The Canadian dollar is down some 40 per cent from recent peaks, in no small part due to the shocking price falls in oil. Bank of America Merrill Lynch, for one, believes the Canadian dollar is “oversold and would correct if oil prices stabilise.”

Then there is the UK, a still larger destination for Hong Kong students studying abroad. Sterling has not come close to regaining pre-Global Financial Crisis levels, in part because of the Bank of England’s dovish monetary policies under its Canadian governor, Mark Carney.

Historically, movements in the pound are not as volatile as in the Aussie or the Loonie, yet they can be sizeable enough. Consider estimates of 11 major banks on where the pound will end 2016 alone: the lowest is US$1.27 and the highest US$1.63, a 25 per cent difference.

Complicating the picture further, Britain has an event-risk situation: it may leave the European Union and there is confusion over what impact this would have. Most assume a negative effect on the currency, but some say it would make the UK a safe haven, or alternative versus Europe, putting the country in a similar position to Switzerland.

Such a high degree of currency uncertainty has led my family to strike Oxbridge off the list of potential school choices. At least that’s how we’re spinning it.

Ultimately, the biggest factor to consider is the US Federal Reserve’s moves. The trade-weighted dollar’s 20 per cent surge since late 2014 came in anticipation of tighter US monetary policy settings, even as other major central banks continue to ease.

Yet there is no guarantee that the Fed won’t get spooked and halt its tightening programme after only that one hike, like Europe did in 2011 and Japan after that one lonely hike we can all vaguely recall from some distant milestone in the 1990s.

So far this year the trade-weighted dollar has lost just over 6 per cent. HSBC for one has already rolled out an equity strategy update with the title, “Winners and Losers from Dollar Weakness” – as if the strong dollar narrative was already dead and buried.

Cathy Holcombe is a Hong Kong-based financial writer