USD/HKD eerily calm as investors downplay risks to Hong Kong dollar peg

USD/HKD eerily calm as investors downplay risks to Hong Kong dollar peg
Written by:
Crispus Nyaga
8th July, 14:18
  • The USD/HKD is little changed today as risks to the Hong Kong dollar peg emerge.
  • The Trump administration is considering measures to undermine the peg due to the national security law.
  • Analysts believe that such a move will not affect China. It will hurt Hong Kong and the US.
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The USD/HKD pair is little changed today as traders ignore the growing risks of the Hong Kong dollar peg to the US dollar. The pair is trading at 7.7500, the upper side of the Hong Kong Monetary Authority (HKMA) limit.

Hong Kong dollar
USD/HKD stable as risks to Hing Kong dollar peg emerge

Is Hong King dollar peg at risk?

According to Bloomberg, the Trump administration is considering measures that will undermine the Hong Kong dollar to the US dollar. The goal of these measures will be to punish Hong Kong and China for the recently-passed national security law.

The administration is also considering other measures to achieve this goal. It is deliberating about whether to end the US extradition treaty with the city and sanctioning banks. As a result, shares in HSBC, the biggest bank in Hong Kong dropped sharply today. Also, the US is considering imposing sanctions on several officials that were responsible for the law.

For starters, Hong Kong has pegged its currency to the US dollar since 1983. The peg mandates the HKMA to keep the currency trading at between HK$ 7.75 and HK$7.85. The currency has remained at the current range since 2005.

When the Hong Kong dollar moves too close to the two ranges, the “central bank” responds by either buying or selling the currency. In recent months, HKMA has intervened in the market by selling more than HK$50 billion because of high demand for the Hong Kong dollars. This demand has come from several large scale IPOs, including JD.com and Tencent.

The Hong Kong dollar peg has helped the city become one of the most successful cities in Asia because of its stability. For example, while most foreign companies do business in China, most of them avoid the yuan because of its volatility.

US options to challenge the peg

While the US can hamper the peg, most analysts believe that it is not worth it. For one, it will not punish China because of the small role the city plays in the broader Chinese economy. Hong Kong now represents less than 10% of the total economy. Also, they argue that it will affect normal Hong Kongers, who have been demonstrating against Beijing. An analyst said:

“Hong Kong appears to have the will — and it certainly has the means — to keep the peg. Any move by the U.S. to try to force a decoupling strikes us as extremely unlikely, given the prohibitively heavy costs.”

Still, some analysts believe that the peg will not work in the long term. Last month, Kyle Bass, a hedge fund manager popular for predicting the previous housing crash, initiated a large short position on the HKD. He is using 200 times leverage to do this, meaning that he will make a lot of money if the currency collapses.

Another reason why the US decision could backfire is that HKMA has more than $450 billion of foreign reserves that it can use. Also, Chinese banks would be ready to provide liquidity through a currency swap line.

USD/HKD technical analysis

USD/HKD

The USD/HKD pair is unlike other floating currencies because of the Hong Kong dollar peg. Therefore, as shown in the chart above, the currency is at 7.7500, which is the lower side of the peg. It is also below the 50-day and 100-day EMAs. Its volatility has also dropped significantly. Therefore, in the near term, the currency pair is likely to remain in this range as traders watch the developments in Hong Kong.

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