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HK Dollar LERS currency peg and HKMA intervention timeline

 Will the Hong Kong Dollar – USD currency peg change?

We believe that the Hong Kong Dollar Linked Exchange Rate System (LERS) or currency peg to the US Dollar is under pressure to delink because of the difference in fundamentals between the two currencies. This is evident from increasing activity from the Hong Kong Monetary Authority to intervene in the currency market. HKMA intervenes by selling Hong Kong Dollars while buying US Dollars.

Hong Kong Monetary Authority

Hong Kong Monetary Authority. Picture by Alan Mak.

The Hong Kong Dollar is an excellent long term currency investment in our opinion as well as an excellent way to diversify for individuals who have exposure to US Dollars. There is room for the Hong Kong Dollar to appreciate as long as:

    1. Hong Kong economy continues to be driven by China’s growth.
    2. US Federal Reserve continues quantitative easing thereby cheapening the USD in conjunction with contraction in the US economy.
    3. The Chinese Renminbi becomes a reserve currency and appreciates as a result of buying by sovereign funds and large investment entities.


Notable advocates of change to LERS

Joseph Yam Chi Kwong, 1st Chief Executive of HKMA (April 1993 - October 2009)Published an academic paperat The Chinese University of Hong Kong in June 2012 that 'proposed Hong Kong de-peg its currency from the US Dollar'.
"No doubt the LERS [Linked Exchange Rate System] has, for almost 30 years of its existence, been a pillar of stability for Hong Kong. But, realistically there are costs involved," Yam wrote.
Peter Wong Tung-shun, Chief Executive, HSBC Asia-PacificWong "told a forum in Hong Kong" in September 2013 "that the Hong Kong dollar's international impact would be reduced once the yuan became a global currency and the government should reconsider changing its currency peg system."
William Ackman, CEO of Pershing Square Capital Management LPDetailed a trade to long Hong Kong Dollar at a CNBC conference in September 2011.


What the current Chief Executive, Norman Chan says

HKMA Information Centre Q&A

November 09, 2012 – I would like to reiterate the firm position of the HKSAR Government that Hong Kong has neither the need nor the intention to change the LERS.  We have kept under constant review the implications of the Linked Exchange Rate for the Hong Kong economy.  The conclusion we have reached is that as a small and open economy, as well as an international financial centre, Hong Kong has always seen its economic growth mainly driven by external factors.  In view of this economic framework, a fixed exchange rate regime can better serve the long-term interests of Hong Kong than a floating exchange rate regime.  Experience shows that under the LERS, Hong Kong has weathered well through various financial crises.  The LERS has also helped maintain monetary and financial stability during cyclical changes and support sustained economic growth in Hong Kong. – Norman Chan, Chief Executive


30 December 2014 – USDHKD volatility increases in absence of high-impact news

Candlesticks are taller, sport longer tails that show bull and bear struggle.

USDHKD volatility increases as can be seen from candlesticks

Candlesticks point to wider intraday movement


October 06, 2014 – Divergence closed then forced apart

Hong Kong Dollar price action over the past week:

  1. On September 29, USDHKD closes DXY divergence reported on September 15 and 28.
  2. Divergence dramatically returns after ‘Occupy Central’ takes to the streets.
USDHKD closes DXY divergence then suddenly parts

USDHKD closes DXY divergence then suddenly parts as ‘Occupy Central’ takes to the streets in Hong Kong


September 28, 2014 – USDHKD races to catch up with Dollar Index

Persistent Dollar Index rally finally convinces HKD bulls to throw in the towel. Early divergence between USDHKD currency pair and DXY was probably a sign that HKD bulls did not believe that the broad dollar rally was a sustainable one. The two will likely re-establish positive correlation evident in 2013.

USDHKD rally, moves away from 7.75

This rally takes pressure off 7.75 and gives HKMA relief


September 15, 2014 – USDHKD and DXY diverge

USDHKD and DXY diverge

USDHKD and DXY (as histogram); interactive chart here

This is how I interpret the divergence in the two: 1) persistent strength in Hong Kong Dollar despite the broad USD rally 2) investors do not believe that DXY gains are sustainable. When DXY reverses is when we see HKD break to the downside which HKMA has to throw in the tower. There is a third possibility: that DXY movement at this moment is not real USD strength but rather weakness in the EUR and GBP.


September 08, 2014 – HK Dollar strengthens, new low

USDHKD goes south of 7.75 boundary, trades at lower low than what we saw in the past three months as well as 2012. Major risk-off?

USDHKD new low

USDHKD makes unprecedented move outside LERS


August 05, 2014 – Russians long HKD in sanction flight; pressure on HKMA

Does Russians buying Hong Kong Dollars to beat US-EU sanctions form third leg in HKD buying that Norman Chan did not foresee?

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

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

USDHKD and DXY daily chart overlaid

This chart suggests that USDHKD is no longer responding to Dollar rally


July 31, 2014 – MegaFon Shifts Cash to Hong Kong Dollars on Sanction Risk

So the Russians are buying Hong Kong Dollars as reported by Bloomberg.

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.

“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.”


July 30, 2014 – Is USDHKD 7.75 an inviolable line in the sand?

Simon Black used the word “assault”. We see this line in the USDHKD chart and the price action happening below.

USDHKD 4-hourly chart

4-hourly chart showing price action ‘assaulting’ 7.75 level


July 28, 2014 – Simon Black from Sovereign Man reports “It’s about time.”

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.


July 16, 2014 – More intervention from Hong Kong Monetary Authority

We consolidate three more pieces from Reuters updating HKMA intervention over July 14 and 15. In addition, USDHKD pair moves above 7.75 for the first time in 8 days which we believe is due to broad strengthening in USD.

USDHKD daily chart

USDHKD above 7.75 for first time in 8 days


July 13, 2014 – HKMA sells Hong Kong Dollar in $2.1B currency intervention

USDHKD hourly chart

Are these the results of HKMA intervention?


July 04, 2014 – CNBC reports HKD intervention and analysis

This week has seen Hong Kong’s first foreign exchange intervention in almost two years to curb currency strength and analysts expect more of the same in the weeks ahead.

That’s because renewed optimism towards China’s equity market and strong flows into Hong Kong’s bond and stock markets should keep upward pressure on the Hong Kong dollar, they believe.

The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, said on Wednesday it bought $2.1 billion over two days to contain gains in the local currency.


July 02, 2014 – Reuters reports HKMA intervention, gives reasons for HKD strengthening

Hong Kong intervened to defend its currency peg for the first time in nearly two years as investor expectations for a rebound in Chinese equities boosted the local dollar.

More capital market activity from new listings and mergers and acquisitions also triggered unusual strength in the Hong Kong dollar, which tested the strong end of its trading band, prompting the monetary authority to step in from Tuesday.


June 19, 2014 – Are these the faces of HKMA-USDHKD intervention?

USDHKD hits 7.7491 at low of day.

USDHKD daily chart

Daily chart of USDHKD



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