HKD: Worried about weakness or rather on its lasting strength? - Natixis

Alicia Garcia Herrero, Chief Economist at Natixis, explains that in the midst of summer, investors had to turn back to their screens to check a currency as dull as the Hong Kong Dollar (HKD) as concerns have been raised about the HKD potentially reaching the most depreciated point of the band as well as the Hong Kong interbank rate (HIBOR) being increasingly low versus LIBOR.

Key Quotes

“Investors still wish to hold HKD because they expect their loss in terms of a lower interest rate compared to LIBOR to be compensated by HKD appreciation. Indeed, market expectations are so far under controlled as forward rates are still very close to the bottom of the band (formally, the strong-side convertibility undertaking).”

“Moreover, the Hong Kong Monetary Authority (HKMA) has been accumulating foreign reserves at a rapid pace for years so as not to be forced to revalue the HKD. This means that there is plenty of ammunition to intervene if the HKD were to reach the top (weakest point) of the band. Our estimates show that the current level of HIBOR lies within the credibility range consistent with the government’s announced exchange rate band. As such, the recent depreciation of HIBOR should only be temporary and likely to reverse all the way to the HKD reaching the bottom (strongest point) of the band, where it has remained for most of the last five years.”

“Beyond the recent weakness of the HKD, what really matters is the way out of the HKD protracted appreciation pressure. The recent depreciation should be seen as an opportunity to “buy time” for the HKMA to rethink its current strategy in the light of Hong Kong’s increasing dependence on the Mainland as argue in our previous report where we propose changes to the current functioning of the currency board.”