Hong Kong's Dollar Records Biggest Two-Day Decline Since 1992

  • Currency extends losses on Friday as stock markets slump
  • Financial Secretary says it may drop to weaker part of peg

The Hong Kong dollar posted its biggest two-day loss in almost a quarter century as concern about the state of China’s economy fueled a selloff in the equities market and spurred speculation the city’s currency peg will end.

QuickTake Currency Pegs

The local dollar fell 0.15 percent to HK$7.7933 versus the greenback. That took its two-day drop to 0.4 percent, the most since October 1992. The global foreign-exchange situation is complicated and it’s possible the currency will decline to the weaker side of the peg, the city’s Financial Secretary John Tsang told reporters. The existing exchange-rate system limits declines to HK$7.85 and caps gains at HK$7.75.

“The fall in Chinese stocks is reverberating to the Hong Kong dollar,” said Khoon Goh, a senior currency strategist at Australia New Zealand Banking Group Ltd. in Singapore. “The market is getting spooked by the turmoil in financial markets and the ongoing concerns about a slowdown in China.”

Hong Kong Monetary Authority Chief Executive Norman Chan said last month the local dollar’s peg was the cornerstone of financial and monetary stability in the city and there were no plans to amend it. A subsequent slide in the yuan, most notably in Hong Kong’s offshore market, has spurred weakness in currencies across Asia excluding Japan, fueling speculation fixed exchange-rate systems in the region will be reviewed. Options prices indicate there’s a 35 percent chance the Hong Kong dollar will weaken beyond its current trading range this year, up from 9.5 percent on Dec. 31, Bloomberg data show.

Yuan Rises

The offshore yuan was little changed at 6.6179 a dollar on Friday, trimming this month’s loss to 0.7 percent. That’s 0.5 percent weaker than the onshore rate, a gap that’s narrowed from a record 2.9 percent last week after the People’s Bank of China intervened to support its currency.

The notional value of outstanding put options carrying the right to sell the currency at rates weaker than HK$7.85 has climbed in the past month to $11.09 billion from $9.56 billion, Depository Trust & Clearing Corp. data show. One-year implied volatility on the Hong Kong dollar -- a measure of exchange-rate swings cited by traders when pricing options -- has more than doubled this month to a 12-year high of 4.09 percent.

The Hong Kong dollar is likely to fall to the weak end of its trading band this year amid heightened concern of a correction in property prices and other assets, China International Capital Corp. analysts Yu Xiangrong and Liang Hong wrote in a note on Friday.

HKMA ‘Committed’

The government “is fully committed to maintaining the linked exchange-rate system, which continues to serve Hong Kong well,” an HKMA spokeswoman said Thursday. “We see no need and have no intention to change the system.” The authority didn’t immediately respond to questions on Friday about whether it had intervened to support the local dollar.

The Hang Seng China Enterprises Index of equities lost 2.64 percent, while the Hang Seng Index slipped 1.5 percent and the Shanghai Composite Index slid 3.55 percent.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE