Goldman Sees Hong Kong Dollar at Weak End of Band on FedBy
Falling currency would curb liquidity in money markets
Gap between Hibor and Libor rates is widest in six years
The Hong Kong dollar’s strength is likely to be short-lived, according to Goldman Sachs Group Inc.
An interest-rate increase by the Federal Reserve as soon as next week will probably push the city’s exchange rate to the weak end of its permitted band, curbing liquidity in money markets, said MK Tang, an economist at Goldman Sachs. Hong Kong’s currency peg, which keeps the rate at 7.75 to 7.85 against the greenback, means that it must follow the U.S.’s monetary policy.
"The No. 1 factor has to be the Fed," Tang said from Hong Kong. "If the Fed really hikes once more we feel it’s quite probable the Hong Kong dollar will weaken to 7.85."
Traders are pricing in better-than-even odds of a U.S. rate hike by year-end, with the Dow Jones Industrial Average slumping on Friday after Boston Federal Reserve President Eric Rosengren warned against waiting too long to raise interest rates. Higher borrowing costs may pressure Hong Kong’s currency, which reached a seven-month high just three weeks ago as stellar gains in local shares drew inflows. Tighter funding conditions would mark a reversal for a city that saw interbank liquidity swell to a record in November amid seven years of near-zero U.S. rates.
Goldman Sachs assigns a 70 percent chance of at least one move higher by the Fed this year, according to Tang.
So far, local borrowing costs remained steady even as U.S equivalents jumped. The three-month U.S. interbank rate, known as Libor, surged this quarter as reforms to American money-market funds reduced demand for short-term debt. Its premium over Hong Kong’s Hibor widened on Thursday to 27 basis points, the most since May 2010.
The local exchange rate was steady on Monday at HK$7.7579 a dollar.
The Hong Kong dollar initially took the Fed’s December hike in its stride, until the combination of that and concern about the yuan’s plunge in early January drove the exchange rate to an eight-year low. This time, depreciation pressure will be mitigated by the gradual pace of U.S. tightening and the policy loosening of most other central banks, said Mole Hau, an economist at BNP Paribas SA in Hong Kong.
To Goldman’s Tang, the gap between U.S. and local rates will probably be wide enough after the next Fed hike to prompt quicker sales of the Hong Kong dollar. That would spell trouble for the local economy and property market just as they show signs of a recovery.
Home sales rose to the highest level in at least 14 months in August, and at least six banks including HSBC Holdings Plc have lowered mortgage rates to 1.4 percentage points above Hibor in recent weeks, the local press reported. Hong Kong’s economy grew more than expected on a quarterly basis from April through June, after contracting in the prior period.
A steady Hibor now means any gains sparked by U.S. tightening could be sudden and rapid, said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd.
"Since U.S. quantitative easing started in 2009, there have been large inflows to Hong Kong, and they haven’t really left," said Ong. "When U.S. dollar rates rise, suddenly people will think they need to buy dollars, which can push up Hong Kong rates quite abruptly."
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