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Friday, November 27, 2020

Hong Kong dollar strength remains ahead of Ant Financial IPO

  • The USD/HKD pair is at the lower side of the peg as demand for Hong Kong dollar rises.
  • Investors have poured more than $7 billion to the city ahead of the Ant Financial IPO.
  • The strength of the financial sector has helped offset woes in other sectors in Hong Kong.

The USD/HKD remains at the lower range of its currency peg as investors remain optimistic about the Hong Kong dollar ahead of the Ant Financial IPO. The pair is trading at 7.7500, where it has been in the past six months.


USD/HKD
USD/HKD has been in the lower side of its peg for months

Ant Financial IPO raises demand for Hong Kong dollar

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Hong Kong has been an embattled city. Last year, large scale protests led the economy to have its first technical recession in years. They hindered trade leading many firms to report bug losses. This year, the Covid-19 pandemic has made things worse. Recent data shows that the city’s economy contracted by 9% in the second quarter. This decline was worse than the mainland China’s growth of about 3.2%.

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The recently-passed Hong Kong security law has also impacted the city in mixed ways. On the one hand, some foreign firms have announced that they will shift their operations from the city to Singapore. At the same time, the city has continued to put more emphasis on its financial sector.

In recent months, some of the most important Chinese technology giants have dual-listed in the city. This includes firms like Alibaba and Tencent. In addition, many investors from mainland China have moved to the city, helping the Hong Kong dollar.

The current craze is about Ant Financial, the finance company started by Jack Ma. The company is expected to raise between $30 billion and $35 billion in its IPO. This will value it at more than $250 billion, making it a bigger firm than PayPal.

According to Nikkei Asian Review, the city has seen more than $7.1 billion of inflows in the past month. This has helped push the HKMA aggregate balance to HK$242 billion, which is the highest it has been since September 2017. This number measures the amount of money in the banking system.

USD/HKD outlook

The USD/HKD is unlike other currency pairs in the market. That is because HKMA has pegged the Hong Kong dollar to the US dollar. This simply means that the pair usually oscillates between $7.75 to $7.85. Therefore, a technical analysis is not ideal for the pair since its movements are mostly because of the interventions by the Hong Kong Monetary Authority (HKMA).

In recent months, there have been questions about whether the currency peg will hold. Indeed, in July this year, Kyle Bass, a famed Wall Street hedge fund manager initiated a highly leveraged bet that the US would remove the peg. If the trade works out, the fund will make about 6,400% if the HKD falls by 40% against the dollar.

However, the HKMA has recently increased its interventions to support the peg. According to the Financial Times, it has intervened more than 40 times this year by selling HK$132 billion. This is the highest amount it has spent to keep the HKD/USD within its range.

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