Forex Comment Apr 21

Too strong? Hong Kong Monetary Authority pushes down HKD

Fitch downgrade of city’s debt over epidemic, protests feeds into currency calculus

by Uwe Parpart
Too strong? Hong Kong Monetary Authority pushes down HKD
An empty MTR metro station in Hong Kong highlights the economic impact of coronavirus on the city. 

(ATF) Hong Kong’s central bank sold HKD1.55 billion ($200 million) for US dollars on Tuesday to weaken the local currency after it reached the upper limit of its trading band (7.75) with the USD for the first time since 2015.

Is this a sign of real HKD strength, given that the greenback also rose 0.36% on the DXY to 100.3160 at 7pm HK time?

Not really.

While Hong Kong has dealt well with the coronavirus outbreak and recorded just 4 new cases over the past two days, Fitch Ratings on Monday downgraded the city's long-term, foreign-currency debt to AA- from AA citing a negative economic outlook due to the virus' impact and last year's political unrest.

In response, one-month Hibor, Hong Kong's interbank rate, has pushed to its highest since 1999 against US Libor, greatly lifting the HKD.

The US dollar remains the unchallenged king in times of stress. The bizarre WTI futures behaviour only reinforced USD demand. Equities in the US Monday and in Asia Tuesday took it on the chin along with European stocks and US futures. 

Even the recently steady and sturdy Chinese currency bent a little. The People’s Bank of China had set parity at 7.0752 Tuesday morning. By 7pm HK time, CNY traded at 7.0920. No sharp decline against the USD, but not insignificant. We put it down to increased uncertainty given the turbulence in oil markets.