TD Securities: Unlikely HKMA Dismantles Peg Anytime Soon

TD Securities note that “HKD has been under pressure trading around the weak end of its convertibility undertaking vs. USD consistently since early May, tracking the widening in the LIBOR-HIBOR spread.”

• “HKMA has had to purchase around HKD252.6bn (USD32.3bn) since the start of the year, resulting in a significant reduction in the aggregate balance, putting upward pressure on HIBOR rates.”
• “A narrowing in the 1-month LIBOR-HIBOR spread should be associated with a lower USD/HKD in the short-term. A further decline in the aggregate balance should help to alleviate pressure on HKD.”
• “The currency board mechanism means that Hong Kong will not escape higher rates. Although HKMA will likely want to maintain support for the HKD, higher rates will mean growing risks to the economy.”
• “In reality FX reserves more than cover Hong Kong’s monetary base giving ample room before there is any question over the ability of the HKMA to defend the peg. We think its highly unlikely that the HKMA dismantles the peg mechanism anytime soon. We maintain our view that eventually HK aligns the exchange rate with the CNY.”