HKD Gearing up for Weakness| Influencer‘s Insight •Jasper Lo

As of March 17, the balance of the banking system in Hong Kong has registered a record high of HK$457.5 billion. The balance has overshoot HK$450 billion for four months, attributed to the loose monetary policies of global central banks as well as the capital inflows through stock transactions and new stock subscriptions. With that said, the question is why the record balance would lead to a weak HKD instead？ Is there any capital flowing outside Hong Kong？

The earlier capital that flowed from new stock subscriptions has run away as stock transactions are no longer at peak times, which puts a discount on HKD, acknowledged Yu Weiwen, President of the Hong Kong Monetary Authority (HKMA). But I believe what he said is not the case. First, the recently soaring DXY has punished non-dollar currencies, including HKD and CNY, against the US dollar. Also, financial markets start betting on an earlier rate hike amid the surging US 10-Year Treasury yield. In the face of the sizeable balance, there is no need for Hong Kong to increase interest rates together with the US.

Similar cases happened during 2017-2019, when a significant interest rate spread occurred because the high balance at the time drove the Hong Kong banking system to ignore the US rate hike. Forex investors seized that opportunity to execute carry trades - sell HKD to buy USD, making the price of HKD not able to stay steady until it dwindled to 7.85. Given that both the Treasury yield and the dollar prices see their rise enduring and that the balance remains at a high level, HKD is set to receive further pressure. It is estimated that it will inevitably challenge the 7.85 level again this year.

Moving forward, the spiking Treasury yield has underpinned the DXY, hampering the currencies of emerging markets. The Turkish lira plunged 14.9% from 7.2 to 8.4850 after the governor of the Turkish central bank was sacked for keeping interest rates high. Financial markets are worried about these markets amid the country's chaos, since they often see capital outflowing to the dollar for risk aversion. However, it bodes well for the strong dollar. Chances are the DXY will soon climb back to the 93.2 level and shot up to 93.2 within this month. Notably, Powell is scheduled to give speeches for three consecutive days from Monday, in which he will continue not to deliver concerns about the rise in US debt. It will pave the way to gains in bond yields and keep bolstering the dollar market.