Currency scare: Hong Kong on alert as local currency falls for fourth straight day

PUBLISHED : Tuesday, 19 January, 2016, 12:40pm
UPDATED : Tuesday, 19 January, 2016, 7:38pm

For the first time in a decade, the Hong Kong Monetary Authority may need to defend the local currency from weakening too much as the Hong Kong dollar has now fallen four days in a row, hitting a fresh four-year low of 7.8090 to the US dollar.

The offshore yuan also weakened by 0.23 per cent on Tuesday to 6.5973 after Beijing said the country’s gross domestic product grew 6.9 per cent last year, the weakest in 25 years.

The Hong Kong dollar hit 7.8090 Tuesday afternoon before bouncing back to 7.8068 later, down 0.12 per cent. It has now dropped a total of 0.61 per cent over the past four trading days.

“There is strong selling pressure on both Hong Kong dollar and yuan these days. Besides capital outflow, some traders may be trying to sell the dollar down amid the poor market sentiment,” said Jasper Lo Cho-yan, director of Tung Shing Futures. “It may well go down to 7.85, which will trigger HKMA intervention.”

HKMA chief executive Norman Chan Tak-lam said on Monday that about US$130 billion that has flowed into the city over the past years is starting to leave following the US interest rate rise in December and the stock market slump.

READ MORE: Hong Kong dollar suffers biggest weekly drop in 12 years amid capital outflow concerns

He said the capital outflow would continue and interest rates rise accordingly but vowed to defend the peg and said the HKMA would intervene when the currency touches the weak end of the peg at 7.85. The last time that happened was 2005.

Capital outflow led to three-month Hong Kong dollar Hibor rising to 0.47 per cent on Tuesday, up from 0.44 per cent on Monday and 0.39 per cent at the end of last year. It is still below the three-month US dollar Libor at 0.62 per cent.

DBS said in a research note yesterday that the Hong Kong dollar had become another proxy for the weak yuan.

Bank of America Merrill Lynch’s emerging Asia FI/FX strategist Claudio Piron warned investors to hedge currency risks.

“For many years the prospect of weaker-than-expected growth in China or a large-scale onshore yuan (CNY) devaluation has loomed large as a ‘black swan’ event risk,” he said. “This is especially so for Hong Kong given its proximity and close economic ties to China...We recommend investors to hedge against the rising risk of weaker-than-expected growth in China and the likelihood of a rising risk premium in Hong Kong dollar rates over and above US dollar equivalents.”

The onshore yuan was trading at 6.5776 on Tuesday, stronger by 0.02 per cent from Monday.

Both onshore and offshore yuan posted a strong gain on Monday after the PBOC announced it would impose a 17.5 per cent reserve requirement ratio from January 25 on foreign banks’ yuan deposits.

The DBS report said the new requirement “will probably deter speculation against the offshore yuan for now”.

The borrowing cost of the offshore yuan, CNH Hibor, dropped back to 1.86 per cent for overnight funding on Tuesday after hitting a record high fixing at 66 per cent last week.

Long-term rates remain high with one-week CNH Hibor at 6.24 per cent, one-month at 9.175 per cent, two months at 9.3565 per cent and three months at 8,936 per cent.