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Hong Kong dollar forecast: HKD tests USD peg amid HKMA intervention, falling liquidity

By Kathryn Davies

Edited by Valerie Medleva

11:24, 18 November 2022

Hong Kong dollar banknotes
The USD/HKD exchange rate has fallen to an eight-month low in November. – Photo: kikujungboy CC / Shutterstock

The Hong Kong dollar (HKD) has held at 8.85 against the US dollar (USD) across much of 2022, supported by the Hong Kong Monetary Authority (HKMA) intervention, which has hurt liquidity. More recently, USD/HKD has fallen to an eight-month low as the Hong Kong dollar strengthens.

Hong Kong dollar to US dollar live chart

In this article, we look at the currency’s latest performance and developments, as well as some of analysts’ HKD predictions.

What is the Hong Kong dollar?

The Hong Kong dollar is the official currency of Hong Kong. It was introduced in 1863 and is among the most traded global currencies.

The USD/HKD exchange rate measures how many Hong Kong dollars make up one US dollar. For example, if USD/HKD is 7.8380 it means that one USD is equivalent to 7.8380 HKD.

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What moves the Hong Kong dollar?

The Hong Kong dollar is not a floated currency. It is pegged against the US dollar within a narrow band.

The peg was first introduced in 1983 as a way to restore confidence in the HKD after a period of devaluation. The Hong Kong Monetary Authority sets the range and can adjust the band’s value if required. However, the pair has been allowed to trade between 7.75 to 7.85 since 2005.

The theory behind the peg is to reduce foreign exchange risk faced by importers, exporters, and international investors. Given that the Hong Kong economy is highly dependent on international trade and is externally focused, having a stable exchange rate is very important. The peg is considered an anchor to financial stability.

How does it work? When the USD/HKD moves too close to one end of the 7.75 to 7.85 limits, the HKMA intervenes by either buying or selling HKD.  

Onshore banking liquidity falls when the HKMA uses foreign exchange reserves to buy HKD from commercial banks. The tighter liquidity lifts interest rates which then attracts capital back to Hong Kong, lifting the HKD.

Historical HKD performance

In 2012, the Hong Kong dollar traded towards the lower end of the peg at around 7.75 to 7.77. On 1 January 2016, it weakened sharply to 7.83 before quickly strengthening again to 7.76. By March 2018, USD/HKD rose to 7.85. 

Two years later, in May 2020, the Hong Kong currency once again strengthened, with the pair’s rate dropping to 7.75.

USD/HKD 5-year chart

After starting 2022 at 7.7950, the Hong Kong dollar weakened across the first five months of the year, pushing USD/HKD to 7.85. 

The rate remained broadly at this level before falling sharply in August to a low of 7.8277, a level last seen in March, before rebounding to 7.85 by early September.

The pair fell sharply again on 10 November. On 16 November, the pair dropped to 7.8178, an almost eight-month low.

The latest Hong Kong dollar developments

As inflation rose to a 40-year high in the US, the Federal Reserve (Fed) has steadily hiked rates. In the November FOMC meeting, the Federal Reserve raised interest rates by 75 basis points (bps) to 3.75%. The terminal rate could rise as high as 5.25%.

The Fed’s aggressive stance on hiking interest rates this year has pushed up the USD and fuelled a capital flight from Hong Kong.

Meanwhile, the HKMA has raised interest rates five times this year and bought Hong Kong dollars to steady the currency against the rapidly rising USD.

According to a Bloomberg report, interbank liquidity in Hong Kong had shrunk 70% since May, when the HKMA started buying local currency to keep it in the 7.75-7.85 trading range. Hong Kong’s aggregate balance, a gauge of cash levels in the banking system, fell below HK$100bn for the first time in two years.

There could be several reasons why cash conditions are so tight. First, the slow initial public offering (IPO) market in Hong Kong has hurt demand for Hong Kong dollars. According to a report in Reuters, total IPO funds dropped by 74% year-on-year to HK$73.2bn. Furthermore, foreign investment in Hong Kong equities, funds and bonds has also fallen. At the same time, interbank liquidity has been depleted by multiple rounds of currency intervention by the HKMA, as it acts to maintain the 7.75-7.85 band.

When the outflow of Hong Kong dollars increases, the HKMA buys Hong Kong dollars and sells US dollars to prevent the exchange rate from rising above 7.85.

GBP/USD

1.29 Price
-0.290% 1D Chg, %
Long position overnight fee -0.0046%
Short position overnight fee -0.0036%
Overnight fee time 21:00 (UTC)
Spread 0.00170

EUR/USD

1.09 Price
-0.100% 1D Chg, %
Long position overnight fee -0.0087%
Short position overnight fee 0.0005%
Overnight fee time 21:00 (UTC)
Spread 0.00018

AUD/USD

0.67 Price
-0.330% 1D Chg, %
Long position overnight fee -0.0066%
Short position overnight fee -0.0016%
Overnight fee time 21:00 (UTC)
Spread 0.00030

AUD/USD_zero

0.67 Price
-0.330% 1D Chg, %
Long position overnight fee -0.0066%
Short position overnight fee -0.0016%
Overnight fee time 21:00 (UTC)
Spread 0.00030

Meanwhile, foreign reserves are also down $33bn since May, although they are still considered ample at $419.2bn. Adequate reserves could help see off any questions about the peg’s future.

Strong reserves mean that even if the aggregate balance falls under HK$100, as it did in the Fed’s 2017-2019 hiking cycle, the impact on the USD peg would likely be minimal. Even if the aggregate balance was wiped out, the HKMA could still use foreign exchange reserves to underpin the peg.

In an interview with CNBC, the HKMA chief executive said that the currency peg “is actually doing Hong Kong great in terms of providing the needed exchange rate stability, especially through cycles and during periods of uncertainty.

“Hong Kong is a very small open economy with an externally oriented nature. So having a stable exchange rate is very important for us. But of course [with] any monetary policy, there will be trade off.” 

More recently, the USD/HKD has experienced a steep sell-off. The exchange rate has plunged sharply over the past week, hitting a low of 7.8178, which will be a relief to the HKMA.

The steep fall in USD/HKD is mainly owing to a weaker USD. The USD has fallen over 4.5% so far this month as inflation data shows signs of cooling and expectations rise that the Federal Reserve will adopt a less aggressive approach to hiking interest rates.

Following a slowdown in the consumer price index (CPI) and core CPI at the start of November and then a decline in the producer price index (PPI), evidence is mounting that inflation in the US is slowing. The Fed officials have also been vocal, saying that now could be the time to start slowing the pace of rate hikes.

The Federal Reserve slowing hikes would take pressure off other central banks to shore up their currencies against the USD and could help stem capital flight.

Let’s delve deeper into what the potential Hong Kong dollar forecast could look like.

Hong Kong dollar forecasts

  • Analysts’ views on USD/HKD

Ken Cheung, chief Asian FX strategist at Mizuho Bank, believes that the USD/HKD could ease if the Fed points to a slower rate hike. In his HKD forecast, he said:

“But in the three-month horizon, we may see Hong Kong dollar weakness take a breather if the Fed indicates signs of slowing the pace of rate hikes.”

Dan Mitchell, portfolio manager at RBC Global Asset Managers considers the bull run in the USD to be coming to an end. He explained: “It’s clear that in the long term, these US-dollar moves are stretched and we would expect that the foreign exchange market narrative in a year's time will be one in which the USdollar is weaker. 

“We think that because a lot of the elements that we look at in our framework are long-term in nature. And these long-term elements suggest that the bull market in the US dollar that started in 2011 to now a decade old is at or very near its end and that the US dollar is extremely overvalued and that overvaluation will now present an obstacle to further gains in the US dollar."

Mitchell added: “We think the greenback will sell off in the coming year and that leaves room for other developed market currencies to appreciate.”

  • USD/HKD forecast from algorithm-based services 

At the time of writing (18 November), analysts at Trading Economics predicted that the Hong Kong dollar could weaken across the final quarter of 2022. The HKD forecast was expected to hit 7.8359 by the end of the quarter. 

In the Hong Kong dollar forecast for 2023, the currency was predicted to hold steady and continue trading at this level.

Wallet Investor’s USD to Hong Kong dollar forecast saw the sign weakening near term, ending 2022 at 7.84. This is above the level it was trading at the time of writing. 

In the longer term, its US dollar Hong Kong dollar forecast for 2025 suggested the rate could rise to 7.913 by the end of the year.

In contrast, AI pickup saw the USD/HKD falling to 7.78 by 2025. However, the service’s US dollar to Hong Kong dollar forecast for 2030 was 7.84.

  • A bonus: EUR/HKD forecast

Wallet Investor’s euro to Hong Kong dollar forecast for 2022 had the pair ending the year at 8.129, above where it was trading on November 16. Over the long term, the pair is expected to end 2025 at 7.726 as the Hong Kong dollar strengthens against the euro.

Meanwhile, Trading Economics’s euro to Hong Kong dollar forecast saw the pair’s rate falling to 7.984 by the end of 2022 and 7.609 by the end of 2023.

The bottom line

When consulting the Hong Kong dollar forecast, remember that analysts can and do get their predictions wrong. We recommend you always do your own research and consider the latest market trends and news, technical and fundamental analysis, and expert opinion before making any investment decisions. 

Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.

FAQs

Has the Hong Kong dollar been going up or down?

The Hong Kong dollar has been going up against the US dollar. At the start of the current quarter, on 1 October, the USD/HKD rate stood at 8.83. On 17 November, it traded at 7.82.

Will the Hong Kong dollar get stronger in 2023?

The Federal Reserve may slow the pace at which it hikes rates over the coming months. In this scenario, capital outflows from Hong Kong could slow, taking pressure off the HKMA to maintain the peg below the 8.85 upper band. 

However, whether the currency could get stronger remains to be seen. Analysts and AI-based forecast services can and do get their predictions wrong. Always do your own research.

Is it a good time to buy the Hong Kong dollar?

Only you can decide whether it is a good time for you to buy Hong Kong dollars or not. Do your own research considering factors such as economic growth, inflation, interest rates, labour market data, and trade figures for both countries. Remember to never trade with more money than you can afford to lose. And keep in mind that past performance is no guarantee of future returns.

Markets in this article

EUR/HKD
EUR/HKD
8.50295 USD
-0.00932 -0.110%
USD/HKD
USD/HKD
7.81222 USD
-0.00017 0.000%

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