HKD sell-off but no de-peg

USDHKD continues to rally reaching a 7.8093 high today. Aggressive selling for the HKD regained momentum after China announced that GDP grew 6.9% (in-line). Hong Kong’s close ties with China have caused investors to link the two nations. China’s weaker growth, expected capital outflows and devaluation are also expected to become Hong Kong problems. Within the three-decade old currency peg regime, the value of the USDHKD can fluctuate within a 7.75 to 7.85 band. Yet, this move feels more like positioning rather than a shift in sentiment over Hong Kong economic fundamentals. In addition, given the real HKD effective exchange rate and inflation differentials with the US, this does not warrant significantly higher USDHKD. Hence we do not see the Hong Kong Monetary Authority abandoning the peg. Furthermore, we suspect that the China proximity argument is weak and a devalued CNY should not necessarily trigger HKD selling. The HKD peg has been extremely positive for Hong Kong’s prosperity by providing stability and allowing the nations to become a hub of international finance. Monetary conditions in Hong Kong remain accommodating with the spread between US-HK interbank rates favoring the US by 17bp. Further capital outflow (estimated at $300bn) will need to leave before liquidity conditions tighten and push up short-term HIBOR.