Carry trade opportunities emerge as Hibor plunges

The USD/HKD exchange rate pulled back slightly as the Hong Kong dollar peg came under severe strain. The pair declined to 7.8440, the lowest point since February 3 after Hong Kong authorities increased their intervention. It is slightly below the upper side of its peg range. 

Hong Kong dollar peg at risk

The Hong Kong dollar has been in a downward trend since December last year even as the city reopens and business activity comes back to life. The USD/HKD has moved from the lower side of the peg to its highest point.

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Hong Kong dollar is facing numerous challenges. For example, as I wrote in this article, I wrote that Bill Ackman, Kyle Bass and other respected investors had placed significant bets that the peg will not stand. At the time, I warned that they were taking a popular trade but one that has cost investors billions in the past. 

Further, the HKD is facing pressure amid low Initial Public Offerings (IPO) in Hong Kong and the fact that tourism is yet to fully recover. The rising tensions between the US and China and weak loan growth has led to the situation. 

Therefore, the Hong Kong Monetary Authority (HKMA) has increased its forex interventions. According to Bloomberg, the HKMA purchased H$ 4.2 billion of local dollars, a situation that reduced the aggregate balance to about H$ 91.86 billion. 

Analysts at banks like Mizuho believe that this aggregate will retreat to about H$54 billion as the Federal Reserve maintains its hawkish tone. Despite the interventions, investors are borrowing the HKD to buy the higher-yielding USD dollar as the carry trade intensifies. As such, the interbank rate for the HKD has crashed to its lowest level on record. 

Because of the Hong Kong dollar peg, the HKMA always follows the footsteps of the Fed. As such, with US inflation still elevated and with the unemployment rate falling, there is a potential for more Fed hikes this year. 

Will the USD/HKD peg last? 

It is always difficult to carry out a technical analysis of the USD to HKD pair because of the peg. Therefore, most traders and investors tend to focus on whether the Hong Kong dollar peg will remain. 

While investors like Bill Ackman have placed bets that the peg will break, the reality is that Hong Kong has the tools it needs to support it. It has billions of dollars in liquid reserves that it can use to support the currency.

The HKD peg has helped to propel Hong Kong as a major finance hub. However, it also has some challenges since officials cannot react directly to the economic situation in the country. They cannot hike interest rates when inflation rises and vice versa.