The Hong Kong Monetary Authority bought HK$3.925 billion ($500 million) of local currency. Hong Kong’s central bank intervened to defend the local currency’s peg against the dollar for the second time in days. The move will reduce the aggregate balance, a measure of interbank liquidity, to HK$70.9 billion on March 14.
Black Swan Options on the Hong Kong Dollar
Although Hong Kong has never lost its link to defend the linked exchange rate system, some investors have been involved in betting on the option of the Hong Kong dollar falling below eight. The market interprets that there are investors betting on the black swan event. But in fact, it’s not. Due to the stable exchange rate, the out-of-the-money option has a lower implied volatility. These options will also become more valuable when the exchange rate of the Hong Kong dollar fluctuates. When the Hong Kong dollar continues to be at 7.85, the volatility of the Hong Kong dollar exchange rate will rise when the Hong Kong Monetary Authority intervenes. Therefore, the investor’s bet is not a currency peg system, but a bet on the volatility of the Hong Kong dollar.
Banks are not in a hurry to raise interest rates
Since the beginning of the year, the United States has begun to suspend the pace of raising interest rates. However, there is a spread between the United States and Hong Kong, and funds will flow to areas with higher interest rates. At present, Hong Kong’s one-month lending rate is 1.49%, while the US lending rate is 2.50%. Hong Kong dollar funds, especially those borrowed from the US dollar in exchange for Hong Kong dollars, will tend to exchange foreign exchange back to the United States. Therefore, unless the interest rate cut in the US narrows the spread, the trend of Hong Kong dollar capital outflow will continue.
However, the balance of the banking system in Hong Kong is still high. According to the experience of raising interest rates in 2004, the interest rate will be raised when the balance of the Hong Kong banking system falls below 20 billion. At present, the United States has suspended the pace of interest rate hikes, unless the Fed turns hawkish again, Hong Kong will not raise interest rates in the first half of the year.
Hong Kong Deposit Rate (Blue) and HKMA Finance Aggregate Balance (Orange)
Data Source: iFund; Bloomberg
Hong Kong dollar shortage is a warning sign of property market risks
The lack of Hong Kong dollar means that the cost of borrowing will rise, and the continuous outflow of funds will further increase the mortgage cost. Although the short-term Fed will suspend interest rate hikes due to slowing economic growth, the long-term Hong Kong and US interest rates will narrow, and some loans will face default risk.
Funds related to Asian Properties
Aberdeen Standard SICAV I – Asian Property Share Fund A2 Acc USD
First State Asian Property Securities Fund I Dis USD
Janus Henderson Horizon Asia-Pacific Property Equities Fund A2 Acc EUR
Janus Henderson Horizon Asia-Pacific Property Equities Fund A2 Acc USD
Janus Henderson Horizon Asia-Pacific Property Equities Fund A1 Inc USD
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