HK Dollar Risk Escalates and Capital Outflow Accelerates

First of all, as I have predicted 18 months ago, Hong Kong dollar outflows are accelerating. Days ago, I reported that the capital outflows (Aggregate Balances) in the first quarter of 2019 and Apr — Aug 2018 reached HKD125.6 billion [1]. Recently, the HKMA released that the HKD deposits of banks in HK fell sharply by HKD111.079 billion in August, a decrease of 1.6% from HKD6.95 trillion to HKD6.84 trillion. In the same period, USD deposits rose correspondingly [2]. It seems that there is a large amount of HKD flows out of the local banking system or into foreign currencies.

In fact, it has been reported last month that the foreign exchange options market is gambled at the peg between the Hong Kong dollar and the US dollar by gambling a break below the weak-side Convertibility Undertaking (CU) threshold (ie, US$1 to HK$7.85). In the past nine months, the USD-HKD exchange rate has repeatedly touched the CU threshold as shown in Figure 1. The options market is now gambling that the exchange rate of the USD against the HKD will be lowered to 7.90 in the next 3 to 12 months. (Figure 2)

Figure 1 USD/HKD has repeatedly touched the weak side to ensure that the police line is 1:7.85. Source: Hong Kong Monetary Authority (HKMA, 2019) [3]
Figure 2 The exchange rate of the US dollar against the Hong Kong dollar will be adjusted to 7.90. Source: Yiu (2019) [4]

According to the prediction by the Wallet Investor website, the exchange rate of the US dollar against the Hong Kong dollar will be 7.859 after one year, which is below the CU threshold, and the exchange rate will rise to 7.928 in five years, which is similar to the forecast in the options market (Figures 3 and 4). Figure 4 shows that the weakening of the HKD began in 2017, and the situation continued to deteriorate. It is believed that it is caused by the fact that the interest rate in the United States has repeatedly been raised during the period but that in Hong Kong has not followed suit. In addition, the economic conditions of Hong Kong have recently been adversely affected by the US-China trade war and local political events, capital outflows are thus accelerated, and the exchange rate of HKD will further be pressurized.

Figure 3 US dollar against Hong Kong dollar exchange rate forecast. Source: Wallet Investor [5]
Figure 4 USD/HKD exchange rate forecast. Source: Wallet Investor [5]

It is understood that in addition to a large amount of converting Hong Kong dollars into foreign currency deposits, many people have opened offshore bank accounts or overseas bank accounts, and have converted into foreign currencies and deposited them overseas. Many overseas banks provide online account opening services, which are fast and convenient. Many foreign currency deposit rates are higher than the interest rates of Hong Kong dollar. As a reminder, the exchange rate can go up or down. Investment in foreign currencies must have exchange rate risks. However, based on the above analyses, the upside risk (ie breaking 7.85) is higher than the downside risk (ie breaking 7.75), and if the investor believes that the peg will not break, then the downside risk is almost zero. In other words, the upside risk and the downside risk are highly asymmetric. When the interest rate of USD is higher than HKD’s, the exchange of Hong Kong dollars into US dollars can have double benefits. This explains why there have been a large number of conversion from Hong Kong dollars into US dollars since 2017. It can be expected that the exchange tide will continue until the risks and returns of the two are about the same. This is, in fact, the inherent design principle of the linked exchange rate mechanism. However, the mechanism has not performed its original role in the past few years, resulting in a persistent lower interest rate in HK than in the US for a long time. It is high time to review.

[A Chinese Version is available at 姚松炎(2019) 港元風險上升,資金流走加速,方格子,10月2日。]


[1] 姚松炎 (2019) 你居然準確預測香港樓價走勢,方格子,9月29日。

[2] 明報 (2019) 【全民撳錢】金管局:8月港元存款減少1110億元,9月30日。

[3] HKMA (2019) Half-yearly Monetary and Financial Stability Report, Sep.

[4] 姚松炎 (2019) 投資者賭注港元匯率弱方保證變化?方格子,8月16日。

[5] Wallet Investor (2019) USD to HKD Forecast, Dollar to HK Dollar Currency Exchange Rate Prediction,

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