The Hong Kong Monetary Authority has acted to curb a surging Hong Kong dollar rate against the greenback - a key issue as the pegged rate plays a large role in shaping the Asian centre's asset prices.

Hong Kong’s monetary authority has bought US dollars to prevent its currency rising beyond its pegged rate, a key issue for wealth managers to watch because the forex regime is central to explaining asset values in the Asian jurisdiction.

According to a statement on the Hong Kong Monetary Authority website, the authority bought $690 million during New York trading hours last week. This adds to the total of $5.64 billion bought between 1 and 15 July.

The peg requires authorities to limit the Hong Kong dollar to a rate of at least HK$7.85 and no higher than HK$7.75.

With pegged exchange rates, there is typically a strong impact from the more powerful “peg” currency – in this case the dollar – which means that the US Federal Reserve’s monetary policy, such as its quantitative easing programme, will have a major effect on Hong Kong. For example, a period of ultra-loose monetary policy has created a headache for Hong Kong authorities as they try to curb high property prices.  

A recent report by Knight Frank, the global estate agency, has underscored why foreign currency movements are often major forces reducing or raising returns from assets, such as luxury property investments in Asia, London and North America. (See that story here.)

Peter Pang, deputy chief executive of HKMA, noted that issues such as mergers and acquisitions and dividend payouts by firms, among other forces, had pushed up the local currency, leading to the dollar purchases to protect the peg.

“If funds continue to flow into the Hong Kong dollar, the HKMA will, in accordance with the Currency Board principles, sell Hong Kong dollar and buy US dollar at the rate of 7.75 to maintain stability of the exchange rate.  The inflows of funds will increase liquidity and hence stimulate asset prices, to which the public should stay alert,” Pang said in a statement.

“Last year’s market turmoil caused by a large-scale outflow of funds from certain emerging markets showed that the direction of fund flows could change spontaneously in response to investors’ sentiments.  As the US economy recovers and its monetary environment normalises, there remain considerable uncertainties in the future direction of fund flows.  The public should be prudent when borrowing and investing,” Pang warned.

“With the Fed’s tapering of asset purchases and a general market expectation for policy rate rise by the Fed next year, compounded by the implementation of the Shanghai-Hong Kong Stock Connect, the net inflow of funds into the Hong Kong dollar has led many to second-guess.  Indeed, the exchange rate has only eased slightly after a net inflow of US$13.8 billion into the Hong Kong dollar in the fourth-quarter of 2012.  During most part of 2013 and the first half of 2014, the Hong Kong dollar exchange rate stayed close to 7.75, reflecting strong demand for the Hong Kong dollar,” he said.

China and Switzerland

The development in this area of the forex market comes shortly after China and Switzerland agreed to enter a bilateral swap agreement, under which the central banks can buy and repurchase renminbi and Swiss francs from each other, at up to SFr21 billion or RMB150.

"This will allow liquidity in renminbi and Swiss francs to be made available to the relevant markets as required. The swap agreement is a key prerequisite for the development of a renminbi market in Switzerland," the Swiss National Bank said in a statement.

China has been pushing to broaden the international appeal of its currency - and status as a reserve currency - through a number of measures, although it has come short of allowing the renminbi to be a completely free-floating currency.