With the Hong Kong Monetary Authority stepping up both the weight and frequency of its intervention in the foreign exchange market, it is worth repeating a few points.
The Hong Kong dollar is not under speculative attack. The yuan is not about to replace the US dollar as our currency anchor. The chance of the Hong Kong government voluntarily abandoning the territory's peg at any time in the foreseeable future is zero.
At first glance those three assertions might seem ill-advised, especially considering that the HKMA stepped into the market five times yesterday, selling Hong Kong dollars to stop the currency strengthening further against the US dollar. In total the HKMA bought US$1 billion in its attempt to prevent the US currency falling through the floor of its HK$7.75 to HK$7.85 trading band.
Moreover, those interventions were only partially successful. Late yesterday the Hong Kong dollar was still quoted at HK$7.75 to the US dollar, despite the weight of money the HKMA pumped into the market. Further interventions look inevitable over the coming days.
But that does not mean our exchange rate system is facing a speculative threat. If speculators were really betting on the Hong Kong dollar to strengthen further, they would have been buying the currency in the forward market.
In fact the forward market is relatively quiet at the moment. The chart below shows the difference between the one-year forward rate and the spot exchange rate. A reading above the zero line implies the market is betting on a Hong Kong dollar devaluation, as in 1997 and 1998.
