The Hong Kong dollar HKD trades in a sternly protected range against the US dollar USD , and while the pair is off the radar for most traders, near- and long-term profit potential does exist. I believe this scenario is unlikely to happen, although I do believe that the HKD can deliver excellent profits at opportune moments for select, alert investors. During colonial rule, the Hong Kong dollar was pegged to the British pound GBP , and in , it was pegged to the US dollar in order to protect the currency from external shocks.
Hong Kong's economic achievements are impressive considering its small size. Through tumultuous times, maintaining the peg has not been easy. The HKMA has been forced to match ultra-low US interest rates, even at the expense of a high inflation rate, and Hong Kong property prices have increased dramatically as a result. Economists believe that this would probably not occur within the next five years, especially while the USD remains the unrivalled international reserve currency—a role which accords the HKD added stability—and while the yuan is not fully convertible.
The HKMA rationalizes that if the current currency mechanism works, why change it? If re-pegging of the HKD becomes a real possibility, however, we could see it fall to parity with the yuan. On the other hand, there is a good possibility that the HKD could devalue. This occurred during times of capital outflow, for example, during the Asian financial crisis.
Weaker demand for HKD might also occur as Hong Kong residents purchase Chinese yuan deposits or increase lending to enterprises in China. It is also possible that a speculator attack might occur, one that causes the HKD to be dumped on the market on a massive scale. This is exactly what happened in and when hedge funds and money managers sold pegged local currencies in favor of the US dollar in order to force their revaluation.
If the Fed were to increase interest rates and the HKMA was slow to raise rates in response in order to maintain the pegged rate , the capital outflow would devalue the HKD. This range keeps most small speculators away, and as a result, profiting from the HKD requires patience. On the other hand, if the revaluation pressure continues to build and officials assess that the current USD peg is limiting economic growth in Hong Kong, we may see signs that foreshadow the delinking of the currencies.
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