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Is USDHKD 7.75 an inviolable line in the sand?

Hong Kong has to examine why its currency is still pegged to the USD

There is a reason I have written so much about the Hong Kong Dollar and its relationship with the USD; I have also followed closely HKMA’s intervention (here, here and here) in the forex market to weaken the Hong Kong Dollar by buying USD. I believe strongly that USD weakening over the years is putting long term pressure on the Hong Kong economy and somewhere in the near future, the Hong Kong Dollar is going to be re-pegged in a way that reflects its strength. But no one puts the idea across more eloquently than Zerohedge and Sovereign Man.

Is Hong Kong-US Dollar Link About To End? HKMA Buys $715 Million To Support Peg

The Hong Kong Monetary Authority bought $715 million (selling HKD) in the FX markets to manage its currency peg, injecting the money into the banking system (and expanding its balance sheet) to prevent HKD from rising above its permitted range.

USDHKD chart 1997 - 2012

USDHKD 1997-2012 chart showing persistent pressure on 7.75 from the market

 

It looks like Hong Kong may soon end its link with the US dollar. It’s about time.

Today Hong Kong is one of the world’s richest economies. When compared with the US, nearly every objective fundamental about Hong Kong’s economy is stronger.

Its fiscal balances are higher. The government runs a budget surplus. Government debt is a rounding error. It’s a night and day difference. There’s no reason why these two currencies should be linked.

Theoretically, Hong Kong’s currency should be much stronger than the peg allows. But its purchasing power is being artificially supressed.

This means that residents of Hong Kong pay more for products and services than they should, including basic staples like food (90% of which is imported).

Just recently the Hong Kong dollar hit the upper limit of its allowable range– exactly 7.7500. And the Hong Kong Monetary Authority has had to spend billions of dollars to defend the peg.

The reasons are unclear, though it’s entirely possible that investors are attacking the peg, similar to what happened to the pound back in the 1990s. We could be in the early stages of such an assault.

These currency pegs are not set in stone; Hong Kong has changed its own peg several times. And the basic fundamentals which led them to the US dollar in 1983 have changed completely.

The US is no longer the undisputed superpower it once was. The US dollar is dragging them down. Hong Kong is easily strong enough to stand on its own.

Bottom line, there’s no longer any benefit in maintaining the peg. Yet the costs (inflation, asset bubbles) are too high. This will eventually right itself.

But if the Hong Kong government revalues the Hong Kong dollar, the gain could easily be 30% or more if they simply revalue to the level of the renminbi.

USDHKD 4-hourly chart

Recent price action showing market ‘assaulting’ 7.75

 

Is 7.75 an inviolable line in the sand for USDHKD?

Hardly.

These currency pegs are not set in stone; Hong Kong has changed its own peg several times. And the basic fundamentals which led them to the US dollar in 1983 have changed completely.

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Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.

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