Right after the Swiss National Bank (SNB) decided to discontinue its three-year minimum exchange rate of 1.20 Swiss francs per euro, unsubstantiated speculations began resurfacing that Hong Kong’s peg would be the next shoe to drop. Ever since last year, many analysts have been speculating as to when the Hong Kong dollar HKD will be re-pegged, either at a lower USD rate, or perhaps even to the Chinese renminbi.
Hong Kong began pegging to the US dollar in 1972 in order to protect its currency from external shocks. The exchange rate spread is between 7.75 and 7.85 Hong Kong dollar per U.S. dollar, fixed by the Hong Kong Monetary Authority (HKMA).
Maintaining the peg has not been easy, as the HKMA has to buy up U.S. dollars to maintain the peg and “sterilize" the buys by taking in HKD from the economy. The HKMA has also been forced to match ultra-low US interest rates, even at the expense of a high inflation rate. The Hong Kong government said in its most recent forecast in December that it expects headline CPI to rise by 4.3% in 2014.
Low interest rates are also seen as a factor in fueling a property bubble in Hong Kong. High costs of housing and inflation are some of the reasons for social unrest.
HSBC estimated Hong Kong’s 2014 GDP to be at 2.2%, compared with 2.9% in 2013. The firm cut its forecast for 2015 GDP growth to 2.8%, from 3.5%, as the Hong Kong property-market and Mainland China’s economy continue to be sluggish.
The Hong Kong Hang Seng index has risen 3.17% year to date. The index, which made a double bottom at 22,600-22,500 levels in December, has been consolidating near the 23,400 level, or 61.8% Fibonacci retracement, for the past several months.
Goldman Sachs analysts just put out a report saying that the People’s Bank of China may ease monetary policies in the next few months as the recent data showed China’s economic growth for 2014 fell short of government targets. China’s stimulus could support the Hang Seng index to move higher and retest the head resistances at 24,600 and 25,400 before breaking out.
We think that a re-pegging of the HKD, either at a lower USD rate or to the Chinese renminbi, is unlikely in the near future due to both economical and political reasons. Some could see a peg to the renminbi that Hong Kong is becoming more dependent on Mainland China, which could stir up further social unrest.
Based upon response of the Swiss Market Index (SMI) to the SNB announcement, the Hang Seng index could take a plunge if a re-peg happens. |