Hong Kong Dollar at Strong End of Peg for First Time Since April

Hong Kong’s dollar rose to the strong end of its peg for the first time in four months, as stocks rallied and the yuan devaluation spurred conversion into the city’s currency.

The Hong Kong dollar climbed as high as HK$7.75 against the greenback on Thursday, before trading at HK$7.7501 as of 6:47 p.m. local time, according to data compiled by Bloomberg. The Hang Seng Index of shares jumped the most in seven weeks as stocks in China rebounded from the steepest five-day slump since 1996 amid speculation state funds have resumed buying. The Hong Kong Monetary Authority caps the local dollar’s gains at HK$7.75 and intervened in April when it last reached the level.

China’s share rally “has driven the Hang Seng up so there’s demand for the Hong Kong dollar,” said Christy Tan, head of markets strategy at National Australia Bank Ltd. in the city. “It’s also derived from the conversion of yuan into Hong Kong dollars at the retail level.”

The People’s Bank of China devalued the yuan on Aug. 11, prompting the currency’s steepest slide in two decades. The move sparked a regional selloff in emerging-market assets and also led to exchange-rate shifts in Kazakhstan and Vietnam. That’s made investors nervous about regime changes in other currencies, including the Hong Kong dollar.

Peg Speculation

The currency’s one-year implied volatility, a gauge of expected price swings used to price options, surged to 3.2 percent on Wednesday, tripling since the yuan devaluation. The gauge dropped to 2.19 percent on Thursday, still higher than the past year’s average of 0.92 percent.

The Hong Kong dollar’s strength is also due to “a lot of talk about the peg,” said Tan.

The city linked its currency to the U.S. dollar in 1983, when negotiations between China and the U.K. over Hong Kong’s return to Chinese rule spurred a capital exodus. In 2005, policy makers committed to limiting the currency’s decline to HK$7.85 against the greenback and capping gains at HK$7.75.

The peg continues to serve Hong Kong well, and there is no need or intention to change the system, an HKMA spokesperson wrote in an e-mail on Wednesday.

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