Speculators bet on peg to change but HKMA insist the link to go on

Hong Kong dollar forwards slide intraday to its weakest level since 1999

PUBLISHED : Wednesday, 20 January, 2016, 10:51am
UPDATED : Wednesday, 20 January, 2016, 9:11pm

The Hong Kong dollar dropped to its weakest level in eight years on Wednesday, while the 12-month forward contract fell below its lower boundary, indicating some traders are betting the currency link may not last.

The Hong Kong dollar fell for the fifth day in a row Wednesday, touching an intraday low of 7.8241 per US dollar, the lowest level since August 2007, before rebounding to at 7.8225 late afternoon, weaker by 0.05 per cent from Tuesday’s close, and 0.81 per cent down over the last five trading days. The interbank interest rate for 3-month Hibor rose to five year high of 0.55 per cent.

The 12-month forward contract for the Hong Kong dollar fell to 7.89, which is beyond the weak end of the peg at 7.85, and its weakest level since 1999.

“The forward market is so weak it shows some traders expect the peg may be changed. However, this would not happen easily, as the Hong Kong Monetary Authority would intervene to defend the peg,” said Jasper Lo Cho-yan, director of Tung Shing Futures.

“There is no sign of a bounce in the Hong Kong dollar. Traders believe capital outflows from the city will continue due to the weak economy and stock market sentiment.”

The HKMA said it is committed to keeping the peg unchanged.

“Hong Kong is a free market and people are trading for different reasons for hedging or speculative purposes. There were also some investors who tried to speculate that the peg may be changed. The HKMA reiterates its commitment to the peg.”

Lo believes the Hong Kong dollar may go down to 7.83 in the near term where it should have some technical support before the HKMA intervenes. The last time the HKMA defended the weak end of the peg was in May 2005.

Hang Seng Bank executive director Andrew Fung said the stock market slump, the weak economy and the US interest rate hikes have led to capital outflows, causing the local currency to weaken.

“There are some speculators trying to sell down the Hong Kong dollar but they are not be able to shake the peg. The Exchange Fund has HK$3.3 trillion while the aggregated balance has HK$337 billion which could be used to defend the peg. I do not think any hedge funds have enough to attack the peg,” Fung said.

The Hong Kong dollar is now trading at the weakest level since the subprime crisis emerged at the beginning of the global financial crisis.

The Hong Kong dollar gained ground in 2009 owing to monetary easing in the United States and Europe that led to a US$130 billion capital inflow to the city that propped up the stock and property markets. The HKMA since 2009 has intervened many times to defend the currency from breaking throught 7.75 per US dollar.

The offshore yuan continue to fall Wednesday, ending at 6.6017 per US dollar at 5:30pm, down 0.19 per cent from Tuesday’s closing level. The yuan has been relatively stable this week. The currency is now trading at a level similar to the end of last year.

The onshore yuan weaker by 0.01 per cent to 6.5800 per US dollar. The currency gained 0.01 per cent on Tuesday and 0.08 per cent on Monday after a gain of 0.14 per cent last week, following depreciation of 1.56 per cent the previous week.

The spread between onshore and offshore yuan has narrowed to 217 basis points, down from a record 1,400 basis points on January 7.