New | Hong Kong battles to keep peg with US dollar going in 2016
The HK$220 billion intervention is 2015 in the market is three times larger than 2014, but is not yet a record
Rate increases in the US means the Hong Kong Monetary Authority will need to battle to defend the local currency in 2016 to prevent the local dollar from becoming too weak because of capital outflows.
HKMA chief executive Norman Chan Tak-lam has warned the US interest rate rise cycle which started in December and expected to continue next year will lead to some US$130 billion in hot money outflows from the city. The HKMA is the de facto central bank of the city.
“This outflow means the Hong Kong dollar will weaken. The HKMA will defend the peg when the currency weakens to the 7.85 (to the US dollar) level. The last time the authority needed to prevent the (Hong Kong) dollar from dropping through this level was 10 years ago,” Chan said.
This year, the HKMA has spent HK$227.15 billion to weaken the Hong Kong dollar in defending the peg, which was introduced in 1983 and kept the Hong Kong dollar with the US dollar at as rate of around HK$7.8 to the greenback. The HKMA will intervene whenever the currency trades beyond the range of 7.75 to 7.85.
The system was introduced in 1983 to keep the currency stable at that time to maintain confidence as China and Britain negotiated the handover of Hong Kong in 1997.
The HKMA has had to intervene to defend the peg from time to time by tapping into the Exchange fund, which now has HK$3.27 trillion. This year, the HKMA had two rounds of interventions to weaken the Hong Kong dollar against the US dollar.