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Russians long HKD in sanction flight; pressure on HKMA

When it comes to defending its USDHKD peg or Linked Exchange Rate System, this time is different for Hong Kong Monetary Authority.

Russians long Hong Kong Dollar to beat US sanctions

Norman Chan, CEO of Hong Kong Monetary Authority may be having sleepless nights. As Bloomberg reports, Russian companies are changing their US Dollar deposits into Hong Kong Dollars. So now we know some of the players who are short USDHKD.

MegaFon Shifts Cash to Hong Kong Dollars on Sanction Risk

OAO MegaFon (MFON), billionaire Alisher Usmanov’s wireless operator, said it has been shifting cash holdings into Hong Kong dollars, a move people say metals producer OAO GMK Norilsk Nickel (GMKN) is also undertaking, as the U.S. and Europe ratchet up sanctions against Russia.

MegaFon decided to keep about 40 percent of its cash in Hong Kong dollars given the global markets disturbances, Chief Financial Officer Gevork Vermishyan said in a phone interview. The Moscow-based carrier has traditionally kept its foreign cash in U.S. dollars and euros, according to the company.

Norilsk Nickel, the world’s largest producer of nickel and palladium, is also keeping some of its cash in Hong Kong dollars now, two people with knowledge of situation said, asking not to be identified as information isn’t public.

As one Russian says

“Keeping money in Hong Kong dollars is essentially equivalent to keeping it in U.S. dollars because of the currency peg,” said Vladimir Osakovskiy, chief economist of Bank of America Corp.’s Russian unit. “Still, for Russian companies it’s much safer from the standpoint of sanctions.”


Russian buying forms third inflow; is different from 2012

Back in November 2012, Chan identified that fund inflows into Hong Kong were driven by two forces.

(1)  Increased allocation to Hong Kong dollar assets by overseas investors

(2)  Issuance of foreign currency bonds by Hong Kong firms in exchange for Hong Kong dollars

He also said that Hong Kong has the ability to keep HKD within its pegged range.

Under the Currency Board system, whenever funds flow into the Hong Kong dollar, triggering the strong-side CU, the HKMA can create Hong Kong dollars to buy US dollars from the market by way of expanding the Hong Kong dollar monetary base.  The HKMA’s ability to create Hong Kong dollars is limitless.  So people need not worry about any shortage of Hong Kong dollars required by the HKMA to keep up its US dollar-buying action.

With a Russian flow buying Hong Kong Dollars and selling USD to beat US sanctions, this may be a third force that HKMA did not predict. It is also the exact opposite trade of what HKMA has been doing to keep the exchange rate from breaching 7.75 so the monetary authority may have to re-examine its ‘inviolable’ currency peg or expend more firepower to fight three forces instead of two in its intervention.


Question in my mind answered

Bloomberg piece about MegaFon removed question in my mind: why did USDHKD stick to 7.75 when there is a broad Dollar rally going on?

The answer: its is no longer business as usual.

USDHKD and DXY daily chart overlaid

Divergence (purple for USDHKD, blue for DXY)

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

“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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