(12 JUNE 2019)DAILY MARKET BRIEF 1:HKD Surges

(12 JUNE 2019)DAILY MARKET BRIEF 1:HKD Surges

12 June 2019, 13:35
Jiming Huang
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Demonstrations in Hong Kong over the extradition bill might be overshadowed by activity in the local FX market. Hong Kong dollar has risen to its strongest level against the USD in today trading at HIBOR has surged. HKD remains the regions most overvalued currency despite indications of economic vulnerabilities. Weakness in US rates on changing Fed expectations and improvement in Hong Kong (1-month HIBOR 2.42% from 0.92% in February) has narrowed LIBOR-HIBOR spread. Yet fears of de-pegging from the USD are overdone. The Hong Kong Monetary Authority’s (HKMA) has over $400bn of reserves which to defend the currency. Despite negative impulse from the Chinese economy, including trade tensions, we do not anticipate a break in USDHKD or changes in the current FX regime. Despite social unrest, the stability of the Hong Kong banking system, lack of FX alternatives and HKMA’s firepower suggest that policy makers maintain the ability to manage upward pressure on interest rates. In the midterm, USDHKD should reverse to retest the 7.850 weak-side convertibility. In the near, term there is concern over the contraction of HKD liquidity. Banks have lent heavily to local real-estate developers and mainland banks. Combined with the new appetite from speculators (due to PBoC issuing bills in HKD) might constrict HKD availability.

By Peter Rosenstreich


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