The Hong Kong Dollar has plunged to its weakest level against the dollar (to which it is pegged) since February 2016, even as the Hang Seng surges higher. As HKD nears 7.80, triggering likely HKMA intervention, we wonder whether we will see a replay of last year's liquidity-driven stock market slump.
In January last year, the HKMA stepped in to defend the currency from weakening too much. As SCMP reports, this came after the Hong Kong dollar fell to an eight-and-a half year low to 7.8924 per US dollar amid worries over capital outflows after US interest rates were lifted in December 2015. The result was a sharp fall in the Hong Kong stock market.
The Hong Kong dollar then entered a period of relative stability, before rebounding in the second half of 2016 as the euro and pound retreated against the US dollar.
Fast forward to today and we find that the situation is once again changed. Major global currencies are rising against the US dollar. Hong Kong, which did not follow the Fed’s tightening moves in December and March, finds itself particularly vulnerable.
If the Hong Kong dollar weakens to 7.8 or below, the HKMA may need to intervene to help prop up the currency, potentially triggering a replay of the sharp fall of the stock market seen in January last year.
The intervention would also be accompanied by an interest rate rise in Hong Kong which would negatively impact mortgage borrowers.
HKMA chief executive Norman Chan has warned the city is facing up to US$130 billion of capital outflows due to expected US interest rate rises in the coming year.
Additionally, liquidity is drying up fast as is evident by the spike in cost of overnight Yuan...
A traditional market saying is to sell in May. That may prove wise advice this year. Watch the currency.