What is good for the Hong Kong dollar is bad for property markets

The Hong Kong dollar on Friday posted its biggest gain against the US dollar since 2003, over concerns about tighter liquidity in the city, after the People’s Bank of China announced it would issue bills in the city.

“The issuance of PBOC bills in Hong Kong aims to enrich the spectrum of renminbi financial products of high credit rating in Hong Kong, improve the yield curve of renminbi bonds in Hong Kong and support the development of offshore renminbi business in Hong Kong,” the Chinese central bank said in a statement.

“There’s a stampede of unwinding of arbitrage trades, which is creating a domino effect of tighter liquidity,” said Jasper Lo, chief investment strategist at Eddid Securities and Futures. “It really is a historical day for the Hong Kong dollar.”

Lo said tighter liquidity would push up interest rates ahead of the expected interest rate increase by the US Federal Reserve next week.

The currency had been hovering near the weak end of its peg against the US dollar this year, forcing the HKMA to spend HK$95 billion to defend it in the currency markets.

Stephen Innes, head of trading at Oanda, said that while the market reaction had taken a tremendous amount of pressure off the currency peg, it was a worrisome sign for property investors nonetheless.

Liquidity at Hong Kong banks is likely to remain tight for the foreseeable future, until the PBOC’s intentions are clear, which would bring the soaring real estate prices in Hong Kong closer to a tipping point given the highly leveraged nature of the city’s property market.

“We are going to see more PBOC presence in Hong Kong money markets after the memorandum … and the PBOC will probably continue taping and draining the Hong Kong money markets and pushing rates, which is an ominous sign for property markets,” said Innes.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes