A man walks past a money exchange shop at Central
Traders are speculating that the Fed could raise interest rates as early as the end of next year as economic recovery gathers pace. Image Credit: AP

Hong Kong: Hong Kong dollar, one of the dullest currencies in the world is gaining attention due to China’s regulatory crackdown and bets on higher US rates.

The Hong Kong dollar has fallen 0.2 per cent in August, poised for its biggest monthly loss since March. Speculation on the timeline of a Federal Reserve rate hike and concern about the coronavirus spread have bolstered the greenback. A selloff in Hong Kong’s shares following China’s crackdown on the country’s biggest technology companies has further weighed on the dollar-pegged currency.

“I wouldn’t rule out 7.8 being breached in the near term if sentiment worsens,” said Eddie Cheung, senior emerging markets strategist at Credit Agricole CIB in Hong Kong. Still, “we will need a much bigger climb in US-Hong Kong yield gap and also a further sustained worsening in emerging-market Asia sentiment” for that move to be maintained.

China crack down

Beijing’s move to crack down on broad swathes of the economy has pummeled stocks in Hong Kong, where longtime tech favorites Tencent Holdings and Alibaba Group Holding are listed. Outflows via the southbound stock connect link contributed to the benchmark equity index’s plunge into a bear market last week. Investors are cautious as they struggle to assign a fair value to affected companies, hurting the demand for the Hong Kong dollar.

The bearish momentum for the currency remains strong for now. Options market shows traders have begun pricing in expectations of more swings ahead in the Hong Kong dollar. The currency’s three-month option volatility against the dollar has climbed to the highest level since April. Risk reversals, which measure the price difference between bullish bets against bearish ones, have also risen to the highest levels in three months.