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HONG KONG, Aug 26, 2015:
Bets are growing of a possible scrapping of a historic peg of the Hong Kong dollar against the greenback, after China’s surprise devaluation of the yuan this month sent financial markets into a tailspin and stoked fears of a global currency war.
One month implied volatility on the Hong Kong dollar – an indicator of expected price swings – jumped to 2.23 on Monday, the highest level in a decade. It was much higher than one on Aug 11 when the People’s Bank of China weakened the yuan by 2%.
“The Hong Kong dollar is seeing a classic flight to safety bid. Investors are de-risking their portfolios and moving funds into Hong Kong dollar bonds and cash,” said Hayden Briscoe, Asia Pacific fixed income director at AllianceBernstein, who is part of a team that manages US$250 billion (RM1.07 trillion) globally in fixed income.
The flight-to-safety bid has made the Hong Kong dollar expensive versus rivals.
“Given currency slides across Asia, the Hong Kong dollar now looks significantly overvalued,” said Kevin Lai, an analyst at Daiwa, adding that the peg would come under tremendous pressure in case of severe credit stress in China and capital outflows following the US Federal Reserve’s policy normalisation.
Many emerging market currencies, including the ringgit, rupiah and Brazil’s real, have slumped to their weakest levels against the dollar in over 10 years as capital fled their slowing economies.
The latest country to join the currency war, Kazakhstan, devalued its tenge by more than a quarter last Thursday.
The Hong Kong dollar rose close to its strong end of trading today and traded at 7.7506 per US dollar, up from 7.7616 on Aug 11. The local currency has been pegged at 7.8 to the US dollar since 1983, but can trade between 7.75 and 7.85.
“Hong Kong is caught in a pincer movement between a prospective US monetary policy tightening and the continued slowdown and travails of the mainland economy with whom Hong Kong’s economic cycle is increasingly more correlated,” said Mole Hau, Asia economist at BNP Paribas.
The so-called currency board arrangements means the Hong Kong Monetary Authority (HKMA) is unable to use independent interest rate policy to influence the domestic economy and may have its work cut out if the Fed’s eventual tightening triggers big capital outflows.
In the last round of mass capital outflows in 1998, Hong Kong’s economy contracted 6% and endured deflation for years after the Asian financial crisis, but the dollar peg survived.
Government officials have reassured that the peg will be retained.
“I don’t think the Hong Kong dollar has come to a stage that the peg has to be changed with no choice like what happened to the Swiss franc,” said Raymond Yeung, an analyst at ANZ.