HKMA was forced into action once more today when the formal UK colony’s currency hit 7.7501 against USD at 04.49 GMT. This marks the 7th time within 2 weeks the de facto Central Bank entered the market to weaken HKD, with the previous intervention action less than 12 hours before, during Wednesday evening in Asia.
One does not need to look further than EUR/CHF to see how well SNB managed to keep to the 1.20 floor. However there are some important differences and similarities between the 2.
1) SNB is not fighting against ECB in this peg, with ECB generally mute about the 1.20 peg. Furthermore, there appears to be no Central Bank pressure to weaken the ECB. In fact, actions from ECB and EU has been pro EUR and fueling the strength of EUR.
This is remarkably different from USD vs HKD, where Ben Bernanke was spotted airing his displeasure about EM currencies being “artificially low” as recent as 14th Oct, during the IMF meetings in Tokyo. Furthermore, the Fed’s current action and also expected future actions are all USD negative, making HKMA’s fight much harder compared to SNB’s.
2) Speculative interest in SNB is also much less, in fact, many traders were in-line with SNB’s weak CHF direction and longing EUR/CHF instead, as evident from OANDA’s position ratios showing average NET 75% long for a large part of last year.
Furthermore, there was never a doubt in SNB’s ability to maintaining 1.20, with the only question back then focusing on whether SNB would increase the floor to 1.25 or not.
Comparing this to HKD, where Bill Ackman made a highly publicized bet against the peg, spurring speculative interest in breaking HKMA.
3) Support for ECB to hold EUR was also met with international support, with Japan and China affirming their commitment to help the Euro-Zone to maintain EUR. Across continent in Asia, things are looking different, with Reserve Bank of India and Monetary Authority of Singapore choosing not to weaken their currency during their latest scheduled meetings. Thailand and Korea has also sound out that though inflow of USD is expected due to QE3, they’ll only be ball watching and not actively fighting against appreciation of their own currencies. Even with a concerted effort, such as one seen with regards to Yen post 2011 Earthquake, weakening currency against market sentiment is hard. Without a concerted effort with other Asian Central banks, HKMA will find the going extremely tough.
Despite price dropping near 7.75 back in Nov 2011, HKMA wasn’t forced into action. We could potentially see a repeat of Apr – Dec 2009 where price acted similarly to EUR/CHF for the most part in 2012.
Last but not least, from a trading perspective, shorting USD/HKD could be viewed as limited risk, due to the upper band of 7.85 which HKMA maintains. Hence a bet on the failure of HKMA becomes attractive to bears as they have a clear level of protection from HKMA itself. Comparing this to EUR/CHF short around 1.20, where risk is much greater during that period with the 1.25 rumor circulating.