Hong Kong dollar likely come under additional pressure this week

Speculators are profiting using trades that don’t assume the peg will go

PUBLISHED : Monday, 25 January, 2016, 8:17am
UPDATED : Monday, 25 January, 2016, 8:17am

The battle between currency speculators and Hong Kong Monetary Authority will remain in focus this week amid a gloomy market sentiment worldwide.

The Hong Kong dollar lost 0.01 per cent last week and is down 0.55 per in the first three trading weeks of the year. The currency, touched an eight-year low of 7.8294 on Wednesday before heavy buying helped pushed the currency back up on Thursday and Friday. Analysts said the currency was under pressure amid concerns about capital outflow, the slowing economy and speculation authorities may abandon the peg to the US dollar.

“It is obviously that full confidence in peg has changed amid the weak stock market sentiment. There were some speculators attempting to push the currency to the weak end of the peg last week. These kind of trades may continue in the week ahead,” said Jasper Lo Cho-yan, director of Tung Shing Futures.

The Hong Kong dollar 12-month futures traded at 7.89 last Wednesday, the weakest since 1999 and beyond the 7.85 upper bound of the peg, which has ignited concerns whether the currency peg would remain in place.

Under the linked currency system, introduced in 1983, the Hong Kong dollar maintains a target of 7.8 per US dollar. The HKMA will use its HK$3.429 trillion Exchange Fund to intervene whenever the currency trades at the strong end of 7.75 or at the weak end of 7.85.

Since 2009, the HKMA has intervened many times to prevent the currency from being too strong due to the US monetary easing policy. An estimated US$237 billion in net capital inflows have entered Hong Kong since 2005, according to Daiwa. However, the US interest rate rise in December has widened the interest rate gap between Hong Kong and the US, triggering capital outflows which started at the beginning of the year and led to the sharp fall of Hong Kong dollar in the past two weeks.

Credit Suisse senior currency strategist Heng Koon How however believes the battle has ended.

“I believe the storm has passed for now and we will have some stability in both the offshore yuan and Hong Kong dollar for a while. It is likely that we will see come consolidation at least until after Lunar New Year,” Heng said.

“The Hong Kong dollar’s peg to the US dollar is still robust and flexible to ride out this round of volatility,” Heng said.

Andrew Fung, executive director of Hang Seng Bank, said the Hong Kong dollar volatility shows strong correlation with Hong Kong stock market movement.

Speculators are taking advantages of poor market sentiments to make profit by trading rather than testing the peg
Andrew Fung, executive director of Hang Seng Bank

“Speculators are taking advantages of poor market sentiments to make profit by trading rather than testing the peg. Speculative trading interest however is not expected to disappear until signs of recovery emerges. I do not see a serious attack on the peg,” Fung said.

Pheona Tsang, the head of fixed income of BEA Union Investment, expects the Hong Kong dollar to trade more on the weaker side of the upper boundary 7.85.

On the yuan market, Heng also believe the offshore and onshore yuan will be stable.

Since the PBOC intervention two weeks earlier, which temporarily pushed offshore yuan overnight interbank funding to 200 per cent on January 12, in an effort to drive away speculators, the currency has been generally stable. The PBOC intervention has helped the currency to rebound, lifting offshore yuan 0.16 per cent last week, adding to a gain of 1 per cent in the previous week. This comes after the offshore yuan fell 1.72 per cent in the first week of this year.

The offshore yuan traded around 6.60 to the US dollar most of last week, narrowing the spread between the onshore yuan and the spot rate.