From last year’s anti-government protests to a surging unemployment rate and the fallout from the pandemic, to say Hong Kong has endured a rough patch is something of an understatement. But there appears to be a flicker of hope in the form of the Hong Kong dollar, now pegged at a strong 7.75 per U.S. dollar—a value not reached since December 2015. This isn’t some random occurrence but the result of the HK dollar’s status as a safe currency in these difficult times, the carry trade, and a recent IPO. Together, these facts seem to augur a solid position for Hong Kong in the post-Covid-19 financial landscape, especially for the stock market.
The Hong Kong dollar has been pegged to its American counterpart since 1983 in a bid to allow the city’s businesses and trades to operate with relative predictability, with guaranteed peg limits between 7.75 and 7.85 per U.S. dollar. With a strong financial system in place, the local currency is rock solid while many regional currencies have fluctuated wildly over the past months. And with the Federal Reserve’s move to slash interest rates to zero in March, the HK dollar even inched towards the stronger end of its trading band.
The reason for this is because smart investors are conducting carry trades: borrowing the low-yielding U.S. dollars to invest in high yielding Hong Kong dollars. The current three-month interest rate spread between the two currencies stands at around 80 basis points. As long as the U.S. interest rate remains at or near zero and Hong Kong’s saving rate doesn’t drop dramatically, we may see this trend to continue.