Hong Kong dollar stands strong in 2H14

Ample liquidity expected through year-end.

The Hong Kong Dollar is expected to see strong inflows in H2, while ample liquidity is seen through the year-end.

According to a research report from Standard Chartered, the Fed’s current tapering programme is offset by other G3 central banks remaining on an easing path, while in the East, China’s growth will likely stabilise as Beijing shifts further towards a loosening stance.

The report also noted that China’s recovery is positive for inflows given the strong China element in locally listed equities.

Meanwhile, the launch of the Shanghai-Hong Kong Stock Connect scheme by end-2014 will also likely boost sentiment towards local equities as Hong Kong further cements its role as a gateway to China while benefiting from increased China flows.

Here’s more from Standard Chartered:

The HKD typically benefits from favourable seasonality in end-October and early November as a result of corporate repatriation ahead of the tax season.

Over 40% of government revenue was received in Q4-2013; we therefore forecast total government revenue of HKD 150bn for 2014.

Finally, interest-rate differentials continue to keep the HKD at or very close to the strong Convertibility Undertaking limit.

HKD interest rates have been persistently trading above USD rates, with the gap widening at higher tenors.

Minor divergence is possible under the LERS, but HKD interest rates should generally follow those of the USD.

Fed tapering seems not to have eased this dynamic; we expect USD rates to climb back above HKD rates only after the Fed implements its first rate hike.