Investors shouldn’t be overly alarmed amidst HKD peg resilience: Bank of Singapore

Risk of Hong Kong Dollar de-pegging is very low.

Investors should avoid being too worried whether Hong Kong Dollar (HKD) peg would hold during capital outflows and the intervention of Hong Kong Monetary Authority (HKMA), Bank of Singapore advised.

This as the HKD “touched the weaker end of its convertibility zone,” prompting the HKMA to intervene by purchasing HKD and selling US Dollars for the first time since pre-pandemic time. The weakness in HKD was on the back of outflow pressures caused by a “faster Fed hiking cycle” and China’s slow growth under the strict pandemic restrictions.

But the Bank of Singapore said it believed that HKMA has the capacity to maintain the HKD peg due to its sufficient official reserves.

“Hong Kong’s official reserves, currently at US$466bn, is 5.8 times Hong Kong’s currency in circulation and 1.7 times its monetary base,” the private bank firm said in its FX research.

With lower risk of de-pegging, the bank suggested to investors to avoid being too alarmist and should be more worried about HKD peg resilience if Hong Kong’s property market weakens or if there are significant rises in HKD interbank rates.

“The bottom line is that the HKD peg will not break, but it will lead to higher interest rates in Hong Kong, which is not helpful at a time when the economy is still struggling and easy monetary policy is needed,” it added.