While Morgan Stanley expects the Hong Kong dollar’s 32-year-old peg to the greenback to be defended, there could be an adverse impact on growth, wages and inflation expectations. The economy is expected to decelerate to 2.1 percent growth in 2016 from an estimated 2.4 percent in 2015.
As long as the dollar keeps rising and the peg is in place, the Hong Kong dollar will also rise against rivals, blunting Hong Kong’s competitiveness. Higher-cost products, coupled with slower growth, will pinch corporate profits, hurt investment, and lead to an adjustment in the labor market.
“If policy makers have to intervene in the currency markets to defend the peg, interest rates could remain elevated, weighing on asset prices and domestic demand,” Morgan Stanley says.