Hong Kong dollar, yuan little changed as Fed rate rise odds spike
The Hong Kong dollar and Chinese yuan were little changed on Thursday after the US Fed held interest rates unchanged as expected while signalling it was still on track for two more interest rate hikes this year.
The Hong Kong dollar was trading at 7.7817 per dollar at 10:45am on Thursday morning compared to a 10-week low of 7.7818 on Wednesday, and compared with 7.7807 on Tuesday. Local markets were closed on Wednesday for a public holiday.
The onshore yuan in Shanghai was little changed at 6.8973 per dollar, continuing to consolidate within a range between 6.83 and 6.96 this year. The People’s Bank of China fixed the daily yuan reference rate 0.09 per cent weaker at 6.8957, the weakest level since April 11.
“As expected, the US FOMC yesterday kept interest rates unchanged, but the prices of interest rate futures reflected a relatively high chance of an interest rate hike in June,” a spokesperson of the HKMA said. “We believe that there remain uncertainties about the pace of US interest rate normalisation. We remind banks, corporates and individuals to remain vigilant and manage risks prudently so as to cope with potential changes in capital flows and market volatility arising from the normalisation of US monetary policy.”
The Fed acknowledged growth had slowed but said that this was transitory only, while labour trends were expected to strengthen further in 2017, Oanda strategists wrote in a note.
The market focus is expected to shift to Friday’s US non-farm payroll data to see if there is further support for the Fed to tighten rates by 25 basis points in June.
Hong Kong’s currency has been gradually weakening this year amid a large dollar liquidity pool, even as global sentiment remains fairly upbeat. Hong Kong commercial banks have kept the prime rate at 5 per cent despite the 75 basis points of Fed tightening since December 2015.
Under the Linked Exchange Rate System, the HKMA is obliged to buy and sell US dollars to prevent the Hong Kong dollar from breaching either side of a trading band ranging between 7.75 and 7.85. Some analysts including Bank of America Merrill Lynch and Goldman Sachs have started to expect the currency to reach the 7.85 the upper bound of the currency band, a level that would trigger Hong Kong dollar buying by the HKMA.
However in a recent research note, BBH wrote that there was no threat to the Hong Kong dollar peg arrangement for the forseeable future because foreign reserves stood at US$396 billion. The brokerage also cited Hong Kong’s strong financial regulation and supervision.