The Hong Kong Monetary Authority won’t have to defend the city’s 31-year old currency peg for long, as history shows inflows don’t last.
The CHART OF THE DAY tracks Hong Kong’s monetary base and exchange rate, which is inverted to show U.S. cents per unit of the local currency. The HKMA bought U.S. dollars on July 1 for the first time since December 2012 to keep its currency within the permitted range of HK$7.75 to HK$7.85 against the greenback. The city’s currency tested the strong end of the band in the fourth quarter of 2012 as the Federal Reserve unveiled a third round of quantitative easing. In 2009, the HKMA intervened as funds rushed to join a rally in Chinese stocks.
“We see periods of the Hong Kong dollar at the strong side due to inflows, but they don’t tend to last,” said Khoon Goh, a currency strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “I expect the peg to remain.”
Hong Kong linked its currency to the U.S. dollar in 1983 when negotiations between China and the U.K. over the city’s return to Chinese rule spurred capital outflows. It was kept at HK$7.8 per dollar until 2005, when policy makers committed to limiting declines to HK$7.85 and capping gains at HK$7.75. The HKMA said on July 26 its currency is likely to remain strong in the near term on demand driven by dividend payments, mergers and acquisitions as well as share sales.
Sanctions on Russia over Ukraine also fueled speculation of an influx of Russian money. Mobile-phone operator OAO MegaFon said it has moved some of its cash into the Hong Kong dollar. OAO GMK Norilsk Nickel, the world’s largest producer of the metal, keeps some funds in the currency, two people with knowledge of the matter said. The HKMA’s injections since July 1 amounted to $9.7 billion compared with $13.8 billion in the final quarter of 2012, data compiled by Bloomberg show.
Hong Kong officials have repeatedly said the linked exchange-rate system is most suitable given the city’s small and open economy. A responsible government should always review policies, including monetary arrangement, although that doesn’t necessarily mean the peg should be changed, Joseph Yam, former HKMA chief executive, said last month.