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Is Hong Kong-US Dollar Link About To End? HKMA Buys $715 Million To Support Peg

Tyler Durden's picture




 

Yesterday saw something quite unusual in the New York trading session. The Hong Kong Monetary Authority bought $715 million (selling HKD) in the FX markets to manage its currency peg, injecting the money into the banking system (and expanding its balance sheet) to prevent HKD from rising above its permitted range. HKMA projects its balance sheet to grow to the end of July, but as Simon Black (of Sovereign Man blog) notes, this could well be the start of a bigger shift - an end to the US Dollar peg..."The US is no longer the undisputed superpower it once was. The US dollar is dragging them down. Hong Kong is easily strong enough to stand on its own."

 

HKMA's balance sheet is surging - HKD demand pressuring peg, thus buying USD (and selling HKD) to manage peg...

 

Is this the beginning of the end of the HKD peg to the US Dollar? (via Simon Black of Sovereign Man blog)

It was a different world in 1983.

 

Michael Jackson invented the Moonwalk. Return of the Jedi opened in theaters across the world. IBM released its most advanced personal computer yet– the XT, with a standard 10 megabyte hard drive.

 

And after nearly a decade of eratic swings and collapses, the Hong Kong government pegged its currency (the Hong Kong dollar) to the US dollar at a rate of 7.80 HKD per USD.

 

This was a big move for Hong Kong. The Hong Kong dollar had originally been backed by silver until 1935 when, facing a shortage of precious metals, they pegged it to the British pound.

 

This made sense in 1935 as the British pound sterling was still (barely) the world’s top reserve currency.

 

But things changed. In 1972, Hong Kong broke from the pound and adopted a new peg to the US dollar.

 

This didn’t last either. After just two years, the US government’s rising debt and inflation forced Hong Kong to abandon the US dollar peg.

 

At that point Hong Kong was well-known and stable… so why bother pegging the currency at all? The HKD floated freely in the marketplace, just like any other currency.

 

It went well for them at first. But by the early 1980s, the Hong Kong dollar had become much weaker due to jitters over the island’s reunification with China.

 

Finally, in 1983, they re-established a peg with the US dollar. And at the time, this probably made a lot of sense.

 

In 1983, Fed Chairman Paul Volker had established tremendous international credibility, both for the US dollar as well as the Federal Reserve. And most of all, Hong Kong was in need of a strong anchor.

 

But 31 years later the world is entirely different.

 

Michael Jackson is no longer with us. The world has sat through three completely lame Star Wars prequel movies. Even the cheapest mobile phone has more storage capacity than the IBM XT.

 

And both the Fed’s and America’s credibility have waned.

 

Today Hong Kong is one of the world’s richest economies. When compared with the US, nearly every objective fundamental about Hong Kong’s economy is stronger.

 

Its fiscal balances are higher. The government runs a budget surplus. Government debt is a rounding error. It’s a night and day difference. There’s no reason why these two currencies should be linked.

 

Theoretically, Hong Kong’s currency should be much stronger than the peg allows. But its purchasing power is being artificially supressed.

 

This means that residents of Hong Kong pay more for products and services than they should, including basic staples like food (90% of which is imported).

 

But after three decades, things are starting to get interesting.

 

Just recently the Hong Kong dollar hit the upper limit of its allowable range– exactly 7.7500. And the Hong Kong Monetary Authority has had to spend billions of dollars to defend the peg.

 

The reasons are unclear, though it’s entirely possible that investors are attacking the peg, similar to what happened to the pound back in the 1990s. We could be in the early stages of such an assault.

 

Even if not, it’s time for a change.

 

These currency pegs are not set in stone; Hong Kong has changed its own peg several times. And the basic fundamentals which led them to the US dollar in 1983 have changed completely.

 

The US is no longer the undisputed superpower it once was. The US dollar is dragging them down. Hong Kong is easily strong enough to stand on its own.

 

Bottom line, there’s no longer any benefit in maintaining the peg. Yet the costs (inflation, asset bubbles) are too high. This will eventually right itself.

 

For the last several years, we’ve been recommending that our readers hold Hong Kong dollars– especially if you normally hold US dollars.

 

The currency is still pegged to a very narrow band, so the most it would fluctuate is 1.27%.

 

But if the Hong Kong government revalues the Hong Kong dollar, the gain could easily be 30% or more if they simply revalue to the level of the renminbi.

 

Given the limited downside risk, this is a very safe bet to make.

 

The best way to do it? Open a bank account in Asia.

*  *  *

Between China unveiling stealth QE, the strengthening of CNY and now the upward pressure on HKD, something is afoot under the surface as The Fed nears the end of QE.

 

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Tue, 07/29/2014 - 12:30 | 5018164 Cognitive Dissonance
Cognitive Dissonance's picture

So when do we declare war on Hong Kong?

Tue, 07/29/2014 - 12:34 | 5018167 Latina Lover
Latina Lover's picture

We already have, since  HK is ultimately part of China.  The USSA must force China into the NWO, aka Feudalism 2.0,  Think Hunger Games, Brave New World and 1984 all rolled into one horrific nightmare, courtesy of the satanic banksters that rule the Fed and BIS.

Tue, 07/29/2014 - 12:41 | 5018219 whotookmyalias
whotookmyalias's picture

I'm sure if the peg ends, based on the past few years, the market will soar.  To the moon!

Tue, 07/29/2014 - 14:50 | 5018911 0b1knob
0b1knob's picture

"The best way to do it? Open a bank account in Asia."

Never heard of FATCA?

Everbank (in the US) used to offer HKD denominated CDs.   They aren't insured and pay 0.000 % interest however.

Tue, 07/29/2014 - 14:58 | 5018959 SafelyGraze
SafelyGraze's picture

this is Great News!

people are redeeming their hongkongars into usdollars at such a high rate that HK needs more usd in order to meet the demand.

proof yet again that the usd is valued internationally as a store of wealth

 

Tue, 07/29/2014 - 12:42 | 5018223 MeMongo
MeMongo's picture

"Think Brave New World " ! Okie Mongo just wish someone woulld pass the Soma!

Tue, 07/29/2014 - 12:59 | 5018310 Totentänzerlied
Totentänzerlied's picture

"The USSA must force China into the NWO."

Comical ignorance. If anything, it is the other way around.

Tue, 07/29/2014 - 16:20 | 5019422 Save_America1st
Save_America1st's picture

More like the NWO is forcing the USSA into China

Tue, 07/29/2014 - 12:42 | 5018221 yogibear
yogibear's picture

Declare war on HK then declaring war on China. Victora Nuland (looney war monger) would be all for that,

Tue, 07/29/2014 - 12:32 | 5018175 LawsofPhysics
LawsofPhysics's picture

It remains a fiat world.  Go ahead and let the Yuan or HK dollar float, by all means...

fucking bring it!!!

Tue, 07/29/2014 - 12:42 | 5018220 Monty Burns
Monty Burns's picture

All previous currency collapses began with a mild descent trajectory, slowly speeded up and suddenly ended with a mad scramble for the lifeboats.  Wonder where the dollar is?

Tue, 07/29/2014 - 13:00 | 5018320 Winston Churchill
Winston Churchill's picture

The : Be careful with your nuts on the oarlock stage .IMO.

Tue, 07/29/2014 - 12:42 | 5018225 Kirk2NCC1701
Kirk2NCC1701's picture

Yes, some shirts are cleaner than others.  Until we get clean shirts, I'd avoid the really dirty ones.

Going topless in not an option.

Tue, 07/29/2014 - 13:13 | 5018369 balanced
balanced's picture

"Going topless in not an option."

My god man, NEVER say something like that in an open forum. We can only pray that the women who read that do not abide.

Tue, 07/29/2014 - 18:26 | 5019865 AgeOfJefferson
AgeOfJefferson's picture

Hey. You look familiar.

Tue, 07/29/2014 - 12:33 | 5018180 Seize Mars
Seize Mars's picture

Uh oh!!!!

Tue, 07/29/2014 - 12:38 | 5018198 PlusTic
PlusTic's picture

Unplug the bitch...let this fraud collapse on its own weight!

Tue, 07/29/2014 - 12:39 | 5018201 Sudden Debt
Sudden Debt's picture

It all reminds if of this little clip from titanic...
Fireworks that wasn't fireworks...
And a drink in the lounge because all will he fine...
http://www.youtube.com/watch?v=wati8mmnajE&sns=em

Tue, 07/29/2014 - 12:39 | 5018204 yogibear
yogibear's picture

Kill the US dollar momentum will spread. The US government and Federal Reserve has been abusing it's Reserve currency status for years.

Tue, 07/29/2014 - 12:39 | 5018206 q99x2
q99x2's picture

Bitcoin: last price $579

Tue, 07/29/2014 - 12:39 | 5018210 NOTaREALmerican
NOTaREALmerican's picture

Huh,  fascinating history there.   Good article.

Tue, 07/29/2014 - 12:45 | 5018230 Kirk2NCC1701
Kirk2NCC1701's picture

The last sentence tells me that this Tyler is Simon Black.

Which itself is a stage name (nom de plum).

Tue, 07/29/2014 - 12:57 | 5018268 Dr. Engali
Dr. Engali's picture

Aside from Tyler's introduction the whole italicized article was Simon Black.

Tue, 07/29/2014 - 12:56 | 5018290 NOTaREALmerican
NOTaREALmerican's picture

I thought "the Tyler's" were known?   I don't really care who they are, but I was under the impression all the participants were "discovered".

Tue, 07/29/2014 - 12:44 | 5018231 Kaiser Sousa
Kaiser Sousa's picture

and of course all this would explain this...

http://www.kitco.com/charts/livesilver.html

Tue, 07/29/2014 - 12:54 | 5018239 Yen Cross
Yen Cross's picture

  The HK markets are getting pretty frothy again. It does say something when HKD is being sold vs USD when USD is being heavily bought on the usdx.

 Hang Seng Overview

  Personally I think usd is going to slammed tomorrow after the q-2 gdp print. Bonds are certaining not going along with the usd buying meme.

Tue, 07/29/2014 - 12:48 | 5018248 jmcadg
jmcadg's picture

How would that affect the Hang Seng?

Tue, 07/29/2014 - 12:55 | 5018288 fauxhammer
fauxhammer's picture

The Hang? A little lower and to the left

Tue, 07/29/2014 - 12:52 | 5018269 LMLP
LMLP's picture

It's pegged, move along nothing to see....

China owns HongKong and it's "old world cleared banking system"....

it'll get phased out only if or when they're ready.

Their peg's withstood massive forces both sides and their proud of it...... 

Tue, 07/29/2014 - 19:45 | 5020168 daveO
daveO's picture

I'm guessing it's a bargain. It allows them to import more gold, cheaply.

Tue, 07/29/2014 - 12:56 | 5018293 Dr. Engali
Dr. Engali's picture

715 million? That is about the size of a fine to on of the major banks for currency manipulation.

Tue, 07/29/2014 - 12:58 | 5018305 laomei
laomei's picture

they'd be better off just pegging it to the RMB, a nice boost in spending ability for the people.  The low-cost manufacturing has long since been shipped off to mainland and beyond.  So it's not like they are fighting for bottom dollar on manufacturing anymore.  Or go singapore and peg to a basket I guess, but RMB would be the simplest seeing as most trade is conducted with mainland and instant convertibility would just smooth everything over.

Tue, 07/29/2014 - 13:07 | 5018352 All is chosen
All is chosen's picture

Oh no, not another usd disconnect. Please don't overtax the zionists as they have enough to do already.....already. The lack of consideration being shown to dog's chosen is very disappointing.

BTW: Talking of disconnects, does anyone know of any non-zionist banks, in a stable country, not about to be bombed for 'non-compliance'?  TIA

Tue, 07/29/2014 - 13:19 | 5018412 kchrisc
kchrisc's picture

"Is Hong Kong-US Dollar Link About To End? HKMA Buys $715 Million To Support Peg"

The peg will end soon, unless the HK pols and crats want to deal with high inflation and also being dragged down to Davy Jones' Locker with the DC US.

Tue, 07/29/2014 - 13:21 | 5018422 CheapBastard
CheapBastard's picture

Is this massive HK printing part of the reason an 800 sf apartment in HK costs $1.2 million?

Tue, 07/29/2014 - 13:29 | 5018456 Gringo Viejo
Gringo Viejo's picture

Wonder if the dollar index will continue to rise when Putin detonates air bursts over DC and NY? Just think'n out loud..

Tue, 07/29/2014 - 13:55 | 5018629 socalbeach
socalbeach's picture

"The US is no longer the undisputed superpower it once was..."

Someone needs to get that message to the Obama administration.  Fast.

Tue, 07/29/2014 - 14:39 | 5018867 mijev
mijev's picture

Sometimes, for fun, I will tell a chinese chick that HK and Taiwan aren't really part of china. The reaction is usually quite heated. Then I ask them why it is that they need a visa to go there and I don't.

Tue, 07/29/2014 - 14:43 | 5018879 smacker
smacker's picture

If HK is about to drop the USD peg, why is it buying USD715 million to push down the HK$? When the peg is ended the HK$ will rise again. Don't make sense to me.

Wed, 07/30/2014 - 01:33 | 5021345 Treason Season
Treason Season's picture

The unpegging of USD/HKD has been successfully predicted zilch times in the last three decades.

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