Hong Kong Dollar Erases Gain as Risk-Off Sentiment Creeps Back

  • Local dollar earlier rose most in four years as shares rallied
  • Bank of America raises forecasts for interbank loan rates

Too Early to Doubt the Hong Kong Dollar Peg?

Hong Kong’s dollar reversed gains and traded within 0.1 percent off its lowest level in more than eight years as risk-off sentiment crept back into Asia, sending stocks and oil lower.

The selloff that’s rocked emerging markets showed no signs of easing as Brent crude traded near the least in more than 12 years. The Hong Kong dollar earlier rose the most in more than four years as Asian assets rebounded before resuming losses in the afternoon. The currency fell to its weakest since 2007 on Wednesday, fueling speculation that the city’s 32-year-old currency peg will end.

The local dollar was steady at HK$7.8174 as of 2:49 p.m. in Hong Kong after rising as much as 0.13 percent, the biggest gain since November 2011, data compiled by Bloomberg show. It sank as low as HK$7.8295 on Wednesday, within 0.3 percent of the lower limit of the HK$7.75-HK$7.85 trading range.

“The Hong Kong dollar is still under pressure, the underlying concerns are still there and there’s contagion from other currency pegs,” said Sim Moh Siong, foreign-exchange strategist at Bank of Singapore Ltd. “We’re still in a risk-off, risk-on scenario and the lack of response from policy makers isn’t helping.”

The central bank said this week it has no intention of ending the current policy, although it pointed out that the local dollar may fall to the lower point of its permitted range. Bank of America Merrill Lynch strategists have cut their year-end forecast to HK$7.85 and predicted it could move to that level as soon as this quarter, saying the currency is coming under “sustained” speculative selling pressure. Hong Kong Monetary Authority Chief Executive Norman Chan said Monday that he was committed to keeping the peg.

Hibor Costs

Volatility in the Hong Kong dollar was sparked after China intervened in the offshore yuan market to deter speculators from betting on depreciation, soaking up the supply of renminbi and driving interbank borrowing costs in the city to records.

Bank of America strategists, including Claudio Piron and Ronald Man, increased forecasts for the three-month Hong Kong interbank offered rate to 1.9 percent for 2016 from 1.45 percent, according to a report Thursday. It was last at 0.63 percent, the highest since May 2009. The rate climbed to a record 16.57 percent in 1998, when speculative bets against the peg surged during the Asian financial crisis.

The Hong Kong dollar was linked to the greenback in 1983, when negotiations between the U.K. and Beijing over the city’s return to Chinese rule spurred an exodus of capital, and policy makers in 2005 committed to limiting declines to the current range.

There’s increasing concern about the sustainability of the peg due to the city’s high-priced property market, heavy exposure to China and its highly leveraged financial system, according to a report from Nomura Holdings Inc.

“A sudden, massive depreciation of Asian currencies associated with a steeper Fed hiking path would appreciate the real effective HKD to an extremely overvalued level, while large-scale capital outflows would push Hibor to an uncomfortable level,” Nomura strategists Young Sun Kwon and Minoru Nogimori wrote. “In this low probability/high risk scenario, the HKMA would face a dilemma to maintain the peg amid higher local interest rates, or adopt new foreign-exchange policy options to allow Hong Kong dollar depreciation.”

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