Poorly performing Hong Kong dollar may trigger HKMA guidance

The Hong Kong dollar fell to an 18-month low on Monday, approaching last year’s level which forced the city’s de facto central bank to defend the currency peg with the US dollar.

It slipped for a seventh day to 7.8216 against the US dollar on Monday, approaching the January 18, 2016 low of 7.8295, which was the currency’s weakest level since the start of the global financial crisis in 2007.

The Hong Kong dollar has been the worst performer among Asia’s 11-most traded currencies in the past month, according to Bloomberg data.

Under the linked exchange rate system, the Hong Kong Monetary Authority (HKMA) is obliged to prevent the currency from breaching either side of a trading band between 7.75 and 7.85. In the current situation, it would sell US dollars and buy Hong Kong dollars to reduce interbank liquidity and raise Hong Kong dollar rates in order to curb depreciation pressure.

Historically however, the HKMA doesn’t wait for the currency to reach the 7.85 lower limit of the trading band before defending the peg, and may prefer intervening in currency markets pre-emptively to avoid panic among financial investors.

Last year, the currency dropping to the HK$7.8295 level was enough to trigger HKMA action, amid the sliding Hang Seng Bank index. But HKMA’s action added to the negative stock market sentiment. This year the Hang seng index is up but analysts say any action by the HKMA will also likely hurt sentiment.