HKD likely to hover slightly below 7.85 level given the still-wide yield spread, says Scotiabank

The Hong Kong dollar is expected to hover slightly below the 7.85 weak end over the near-term, given the still-wide yield spread, according to the latest research report from Scotiabank.

The HKMA has purchased a total of HKD33.70 billion (USD 4.29 billion) worth of Hong Kong dollars with its foreign reserves since last Thursday when the local currency fell to the weak end of its 7.75-7.85 trading band for the first time since the band was set in 2005. The aggregate balance will decrease to HKD146.2 billion on April 19.

The special administrative region’s (SAR’s) de facto central bank is believed to continue to defend the weak-side Convertibility Undertaking (CU) firmly with the capability guaranteed by the Currency Board system, which will drain more HKD funds from the banking system.

As is known, Hang Seng Index constituents are more diversified now compared to those in 1998, while household debt service ratio has dropped to about 35 percent at end-2017 in line with a very low delinquency rate from above 100 percent in 1998.

"The aggregate balance will shrink further in our view, leading to even higher HKD interest rates that will help close the US-HK interest rate gap and end arbitrage trades that cause outflows from the SAR. It will increasingly bolster the HKD exchange rate afterwards.

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