The Once Dull Hong Kong Dollar Keeps On Thrilling: QuickTake

(Bloomberg) -- Pegged to the U.S. dollar since 1983, most of the time the Hong Kong dollar is the dullest currency around. But this past year or so has been different: First, it slumped to the weakest in more than a decade, prompting the central bank to buy Hong Kong dollars for the first time since 2015. But the decline continued and the currency closed at its lowest since 1984 in August. Then, in one dramatic trading session in September, the Hong Kong dollar surged the most in 15 years. What is going on, and why are homeowners in the world’s most least affordable property market paying particular attention?

1. Why did the Hong Kong dollar get so weak?

Primarily because the interest rates that matter did not increase in tandem with rising U.S. rates, making it more attractive for investors to sell local dollars and buy higher-yielding U.S. dollars. When the Hong Kong dollar fell to the lower end of its trading band in April, the Hong Kong Monetary Authority -- as it is mandated to -- began buying the local currency.

2. Why were interest rates stuck?

Simply put, an abundance of liquidity. As one of the main global financial hubs, Hong Kong has drawn massive inflows as a result of monetary easing by the world’s major central banks and an exodus of capital from mainland China. Investors there have been moving funds into markets including Hong Kong to diversify their portfolios. Those inflows mostly remain in Hong Kong, meaning banks have been flush with cash. In such circumstances, there is no pressure for them to raise interest rates. However, by purchasing more than $13 billion of local currency since April, the central bank drained a lot of the excess.

3. So are interest rates rising now?

Yes. Home loan rates had their biggest jump in five years in August. And banks have been raising their Hong Kong dollar time deposit rates, with HSBC Holdings Plc lifting the rate for three to 12-month periods by 10 basis points this week, the Hong Kong Economic Times reported. The prospect of higher rates was cited as one of the reasons the local dollar surged as much as 0.63 percent on Sept. 21, its biggest gain since 2003. That pushed it beyond the midpoint of its trading band of $HK7.75 to HK$7.85 per U.S. dollar. Analysts also cited stop losses and upcoming holidays as possible triggers for the move.

4. Why are homeowners watching?

Real estate has been on a 15-year bull run. Hong Kong’s property market is facing more downside risks with borrowing costs likely to rise, according to Financial Secretary Paul Chan. Lenders haven’t raised the prime rate, which affects the costs of mortgages, since 2006, but the chance of a hike is increasing, especially with the U.S. Federal Reserve expected to lift rates again. Citigroup Inc. and CLSA Ltd. are among those forecasting declines in home prices as stocks tumble and households brace for a prime-rate increase.

5. So is the Hong Kong dollar’s roller-coaster ride over?

Not according to some analysts. Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong, sees it returning to the lower end of the trading range in due course since Hong Kong is “fully exposed to slowing Chinese growth."

The Reference Shelf

  • A QuickTake explainer on how the Hong Kong dollar got so weak.
  • Bloomberg’s Fion Li recalls the peg turning 30.

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