Is USD/HKD Nearing Its 2015 EUR/CHF Moment?
Matthew Weller | Aug 13, 2019 04:49PM ET
As my colleagues have mentioned in recent days, the ongoing protests in Hong Kong are reaching a critical level, with major implications for essentially every global market.
For the second straight day, flights out of Hong Kong have been disrupted while Chinese military forces gather in nearby Shenzen. The continued shutdown of the global financial hub and the potential for further escalation raises the risk of a severe economic disruption in the region. It also limits Chinese leaders’ bandwidth to focus on the escalating trade war with the US, explaining some of the broader market implications.
But are FX traders ignoring the pair that may be most impacted by the ongoing Hong Kong protests?
For over 25 years, now, the Hong Kong dollar has been pegged to the US dollar. Its current trading band – between HK$7.75 and HK$7.85 – has been in place since May 2005 and has never been broken or even severely tested. Given the Hong Kong Monetary Authority’s (HKMA) massive war chest of reserves and exchange fund bills, investors have had little reason to question the stability of the peg…until now.
Get The News You Want
Source: TradingView, FOREX.com
Now, the ongoing turmoil and risk of military intervention by the People’s Liberation Army (PLA) is prompting Hong Kong residents and firms to consider moving capital out of the region. This selling pressure forces the HKMA to buy Hong Kong dollars to defend the peg, depleting its reserves. If the situation continues to escalate and capital outflows accelerate, the central bank may eventually be forced to drop its peg, which could lead to a dramatic weakening in the HKD (surge in XXX/HKD).
FX traders need not look back too far for a rough (if inverse) analog: after prohibiting EUR/CHF from dropping below 1.20 for over three years, massive capital inflows forced the Swiss National Bank to abandon the cap on the value of the Swiss franc in January 2015, leading to an immediate 20% surge in the CHF. The moral of the story is that massive market flows into or out of a region can overwhelm even the most well-capitalized of central banks.
Of course the peg appears stable for the moment and the HKMA still has plenty of reserves to deploy as needed. But much like the EUR/CHF situation from a few years ago, traders should consider all scenarios and evaluate whether a speculative position in USD/HKD – an asymmetric risk/reward position with a geopolitical catalyst – may make sense.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.