China uptick, easy money drive demand for HKD

PUBLISHED : Thursday, 03 July, 2014, 2:08am
UPDATED : Thursday, 03 July, 2014, 2:08am

Improved economic activity on the mainland is the main driver of renewed demand for Hong Kong dollars that has forced the city's de facto central bank to intervene in currency markets for the first time in 18 months to defend the peg to the greenback.

Surging speculative inflows, fuelled by the super-easy monetary policy of the world's major central banks that has sent capital flooding into emerging markets, have put sustained upward pressure on the Hong Kong dollar.

[Speculative inflows have] been an important part of the demand

"This has been an important part of the demand," Stephen Sheung, head of investment strategy at SHK Private, told the South China Morning Post.

Sheung said the currency had been strong for several weeks and that equity analysts were upgrading their views of Chinese company profit growth. Optimism was fuelled on Tuesday by two upbeat influential surveys of purchasing managers on the mainland.

The Hang Seng Index, closed on Tuesday for a public holiday, rallied 1.5 per cent to a 2014 high of 23,549.62 points yesterday in response to the surveys, while the Shanghai Composite Index hit a nine-day high.

Data shows the Hong Kong Monetary Authority (HKMA) had bought US$2.1 billion in the past two days at HK$7.75 per US dollar, the upper limit of a convertibility range that triggers intervention.

Hong Kong pegged its currency to the US dollar in 1983 when negotiations between Beijing and London over the city's return to Chinese rule spurred capital outflows. In 2005, policymakers committed to limiting the currency's decline to HK$7.85 per dollar and capped gains at HK$7.75. When the local dollar reaches the strong end of the trading range, the HKMA buys US dollars to prevent further appreciation.

The HKMA said in a statement that commercial activity, mergers and acquisitions and upcoming dividend distribution contributed to renewed demand for the currency.