Jake's View | Hong Kong monetary system returns to balance after a double whammy

The Hong Kong dollar ended Friday having suffered its worst week of declines in 12 years as investors yanked massive sums out of Hong Kong stocks, while analysts believe further outflows will add to borrowing costs, further weighing on the local economy.

SCMP, January 16

Scary stuff and I am certainly prepared to believe that there is more bad news to come. But what is happening to the Hong Kong dollar just now is actually a welcome relief from a long bout of one way pressure.

First, however, an excuse. I do not believe that a picture is always worth a thousand words. Television, for instance, does more to subtract than to add to the sum of human knowledge. But words are not worth much in economics compared to what a chart can tell you. Hence ...

My first chart sets out the story of the HK dollar to US dollar exchange rate in recent years. The two black lines mark the intervention levels. For more than ten years now the HK Monetary Authority has been obliged to stop the HK dollar from going stronger than HK$7.75 or weaker than HK$7.85.

The jagged line in between gives you the actual market rate and it clearly shows that only rarely over the last ten years has the HK dollar been weaker than the official HK$7.80 peg. For the last four years in particular it has regularly butted up against that permissible strongest rate of HK$7.75.