USD/HKD Snaps Back From top of Range

USD/HKD reversed sharply from the top of the peg’s range last week as currency markets reacted to the softer-than-expected US inflation data.

The Hong Kong dollar was on the offensive against the greenback last week, edging higher by 0.18 percent. The HKD strength comes after the US inflation data for July came in below expectations. The Consumer Price Index (CPI) rose by 8.5 percent on the month, below the forecast of 8.7 percent. Subsequently, some wind has come out of the dollar’s sails. The resulting move lower in USD/HKD is helping to allay fears that the US dollar peg is under threat.

The peg, which has been in effect since 2005, ensures that the HK Dollar trades within a band of HK$7.75 to HK$7.85 per US dollar. When the rate approaches either end of the range, the Hong Kong Monetary Authority (HKMA) steps in, either buying or selling dollars.

Tensions with the US and a slowdown in the Chinese economy has resulted in US/HKD grinding along the top of the peg’s range for the last three months. As a result, the Hong Kong Monetary Authority has intervened several times recently to maintain the peg. This has led many to speculate the peg could fall.

However, Hong Kong’s financial secretary Paul Chan said the nation has enough firepower to keep the peg in place.

“Hong Kong’s huge foreign exchange reserve of over US$440 billion, which is equivalent to about 1.7 times the monetary base of the Hong Kong dollar, ample liquidity in the financial and banking system, stable banking operations and high-quality assets — all of these are solid foundations for maintaining the linked exchange rate system.”

US Dollar to HK Dollar Outlook

For now, the peg system appears to doing its job. For that reason, the US dollar to HK dollar exchange rate should remain capped at HK$ 7.85. As a result, we may expect US dollar inflows into HK at the top-end of the peg.

However, a return to 7.85 will eat into the country’s US dollar reserves. For that reason, some caution is warranted. Nonetheless, for the moment at least, the markets biggest fears seem to be subsiding. With that in mind, USD/HKD is likely to drift lower in the immediate future.

USD/HKD Price Chart