HKD is pegged to USD. The fixed range is 1 USD = 7.75 – 7.85 HKD.
However, a weird thing is happening recently.
HIBOR (Hong Kong Interbank Offered Rate) is dropping dramatically.
For a USD-pegged currency, its borrowing rate normally increases or decreases with USD, and is similar to USD, otherwise arbitrage may happen.
Fed’s fund rate currently is 4.25% to 4.50%.
HIBOR 1-month dropped from 4% to below 1%. from May to Jun.
May 2nd, 1 Month HIBOR is 3.98363% vs. Jun 19th, it’s 0.53506%
A 350 bps drop in 1.5 month! Crazy world.
Three things may happen:
1/ Fed to decrease interest rate.
That will probably happen within the next 12month, but not in the July meeting.
Possible in Sep and/or Dec meeting.
2/ HK to limit money outflow.
It will become more like mainland.
But why?
HK doesn’t have the incentive to do this. And Beijing also wants a special international finance center.
Thus, unlikely.
However, there might be more mainland’s RMB converting into HKD – think about SOEs.
Since they are under the direction of Chinese gov, they won’t participate in every corner of the global capital market.
These HKD will behave like under the capital control.
3/ HKD-USD peg breaks
Too big a thing.
In short-term, seems unlikely.
In early May, HKMA needs to sell HKD and buy USD.
In early May, the exchange rate hit the strong-side CU of HK$7.75 to US$1 four times on three trading days, during both Hong Kong and non-Hong Kong trading hours. The HKMA sold HK$129.4 billion in exchange for US$16.7 billion in accordance with the LERS mechanism.
After Fed’s rate decision in June, HKMA expects carry trades may drive USD stronger against HKD and makes HIBOR higher.
If carry trades are to persist, the Hong Kong dollar exchange rate may weaken further, and may even trigger the weak-side Convertibility Undertaking. In such a case, the HKMA would then sell US dollars in exchange for Hong Kong dollars in accordance with the LERS, leading to a corresponding decline in the Aggregate Balance, hence driving Hong Kong dollar interbank rates to gradually increase.