Investors speculate that HK Dollar will change peg

Hong Kong Monetary Authority intervenes at 7.75 to keep currency inside band

The Hong Kong dollar is pegged to the US Dollar at 7.80 HKD to 1.00 USD since 1983. Policy makers set a upper and lower limit of 7.75 and 7.85. With the 29 year peg in place, there is little room for directional movement. However, there was recent news that Hong Kong Monetary Authority (HKMA) intervened to sell thrice. This caught my attention. I am interested to know on whether there is a trading or investment opportunity here.

Hong Kong Dollar chart

HK Dollar testing 7.75 regularly since 2005; the more ‘tests’ the great investors hope for breakout

Hong Kong Dollar has been testing the 7.75 cap

My research found that:

  1. Capital inflows into Hong Kong stock and property markets drive demand for Hong Kong Dollar
  2. Inflows partly driven by monetary easing in US and Europe
  3. Mainland Chinese traveling to Hong Kong
  4. Hong Kong allowing foreigners to migrate through property investment
  5. Hong Kong’s credit rating upgraded by Moody’s added the confidence in currency
  6. Strong China (mainland) trade performance, led to increase in Hong Kong’s trade and trade related services
  7. Investors feel that Hong Kong’s economic performance increasing tied to China’s and Hong Kong Dollar may be forced to re-peg if Renminbi becomes fully convertible

Because of these factors, we are seeing the HKD test 7.75 regularly since 2005. HK Dollar is visibly appreciating against the US Dollar.

Upward pressure on Hong Kong Dollar may be a long term trend

Although global growth may be slowing, I feel that some of the factors we see are here to stay. For example, Hong Kong competitiveness and China’s growth will persist despite there may be temporary setbacks. At the moment, there is very little opportunity in the way of scalping or even swing trading. However it would be interesting to look at  it as a long term investment where there is certainly a chance that the Hong Kong Dollar could be re-pegged in a way where it strengthens against the US Dollar. In  the meantime, the actions by the Hong Kong Monetary Authority may have just begun but might not be the last we see.
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