Despite Persistent Inflows, Hong Kong Dollar Declines to Month’s Lowest

Despite Persistent Inflows, Hong Kong Dollar Declines to Month’s Lowest 

The Hong Kong dollar, which remained the ninth most traded currency in the world as of April last year, has been hovering near the lower limit of its trading band a year later. The currency, also used in neighbouring Macau, is at its lowest since the local borrowing costs remain higher than those on the US dollar and as capital flows into the city.

Despite weeks of trading at the strong end of its band against the greenback, the Hong Kong dollar now appears to have weakened. The city’s de facto central bank sold HK$13.4 billion ($1.7 billion) to purchase the greenback on Thursday, taking the total it has spent this year to keep the local currency from strengthening further.

China’s controversial national security law for Hong Kong is considered one major reason behind the drop in Hong Kong dollar since mid-June. It appears the currency exchange rate has highly been buffeted by China’s decision to impose new laws to curb the growing anti-government protests, and disagreements in the semi-autonomous city.

Recently, about 600,000 residents defied the new security law to vote in primaries held by opposition parties. The move was taken despite the Hong Kong government’s constant warnings that such an act could lead to the violation of law.

The sudden decline in Hong Kong dollar amid the persistent inflows, sent shockwaves throughout the city. Experts believe that the possible financial sanctions and narrowing yield gap between the Hong Kong and the US currency may have had triggered the biggest drop. Before the drop, it was considered that the business sentiment had hit a five-month high.

Meanwhile, many traders are doubtful over Hong Kong’s future as a financial hub. The traders believe that the financial sanctions by the US amid the ongoing US-China tensions could further impact trade in Hong Kong. The depreciation could be an early sign of concern but still there are many others who are hopeful that it might cool down later in July.

Even after falling to as low as 7.7527 per greenback in late trading by week end, the Hong Kong dollar was still 0.02 percent stronger until Monday 12:22 pm. The currency’s forward points of the same tenor that are near a four-month low reflected depreciation concerns.

In order to keep the currency from strengthening beyond its trading band, the Hong Kong Monetary Authority sold HK$48.7 billion ($6.3 billion) last week. However, Friday’s loss came after the Hang Seng Index fell 1.8 percent, paring its gain for the week to 1.4 percent.

A report stated that the difference between Hong Kong dollar’s one-month Hibor and the borrowing costs on the greenback was 22 basis points, the number which OCBC Wing Hang Bank Ltd. stated would make the long carry trade unattractive. The statements came when the demand for Hong Kong dollar was intensifying in the face of constantly increasing politicised environment.

Clearly, Hong Kong’s financial system is caught in the US-China rivalry, but how long can the former British colony remain immune to the deflecting losses. China’s national security law for Hong Kong and sanction threats from the US have further involved the semi-autonomous city into controversies.   

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