Where now for the Hong Kong dollar?
Questions arise on future of the currency and its relationship with the yuan, with one hedge fund betting that the link to the US dollar will not last
Hong Kong's determination to maintain its exchange-rate peg to the US dollar has the confidence of currency-forward traders even as it fails to sway hedge-fund investor William Ackman.
The founder of New York-based Pershing Square Capital Management said at the weekend that he was keeping a wager that would profit if Hong Kong let its currency appreciate.
Two-year forward contracts are weaker than the average in the past three years and the median forecast in a survey is for an exchange rate of HK$7.76 against the greenback at the end of next year, within the allowed trading range of HK$7.75 to HK$7.85.
The Hong Kong Monetary Authority said it bought US$603 million during New York trading hours on Friday after the currency's move to HK$7.75 obliged it to intervene.
The linked exchange rate has given Hong Kong companies stability in commercial contracts while tethering monetary policy to that of the United States, where borrowing costs are being held down to help create jobs and prop up the housing market.
Hong Kong's unemployment rate is near a four-year low and home prices are at record highs.
"Any change in the peg would have certain costs but highly uncertain benefits," Robert Minikin, senior foreign-exchange strategist at Standard Chartered in Hong Kong, said yesterday. A shift "is likely to be long-delayed and perhaps come in the context of full yuan convertibility" he said, adding that the mainland currency was unlikely to trade freely for another 10 years or more.
The city's officials have repeatedly said there were no plans to adjust the peg and HKMA deputy chief executive Arthur Yuen Kwok-hang said on Friday that the authority saw no need to alter the arrangement.
Ackman said in September last year that he was buying Hong Kong dollar call options, which give investors the right to buy the currency at a set price by a specific date.
The easiest way to allow the currency to appreciate would be to change the peg to HK$6 per dollar and then link to the yuan over three to six years, he said at a conference last year in New York.
"Yes we continue to have the bet on," Ackman wrote in an e-mailed response to questions over the weekend.
He declined to say whether he would be adjusting the size of his wager now that the upper limit of the peg was being tested.
"The recent increase in demand for the local currency is related to a less-strained European market, weakness in the US dollar and declining US interest rates, which have prompted capital inflows into currency and equity markets in the region," the HKMA said in a statement on Saturday that gave details of the intervention, the first since December 2009. "Upward pressures have similarly been observed in other Asian currencies."
Donald Tsang Yam-kuen, Hong Kong's former chief executive, said last year that the Hong Kong dollar's peg would stay at least until the yuan was freely traded.
China ended a peg in 2005 and the People's Bank of China said last month it was moving toward full convertibility "in a steady and orderly manner".
The goal was likely to be achieved by 2020, Chen Yulu, an academic adviser to the central bank, said in Beijing last month.
Hong Kong linked its exchange rate to the US dollar in 1983 when negotiations between China and Britain 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 US dollar and capping gains at HK$7.75.
Home prices that surpassed their October 1997 peak and rising costs of food imports are boosting the risk of asset bubbles in Hong Kong and fuelling calls for a review of the peg.
Joseph Yam Chi-kwong, the former HKMA chief who helped introduce the currency link and defended it against speculators during the Asian financial crisis, said in June the city should review the exchange-rate system.
He said alternatives included widening the trading band or turning the range into a "corridor" whose width, slope and centre could be periodically reviewed.
Yam has been the most senior serving or former Hong Kong official to speculate on changes to the currency link.
He fended off a speculative attack to weaken the Hong Kong dollar and break the peg during the Asian financial crisis in 1998, a policy that involved US$15 billion of stock purchases and proved profitable for the city.