The Hong Kong dollar has had a history of being a very manipulated currency with only a short period in the late 70's to early 80's where it was free-floating. However since 1983, the HKD has been pegged in one form or another to that USD at a rate of 7.80. It wasn't until 2005 that a banded region for the HKD was introduced. The range now stands at 7.75 - 7.85 and more often then not the HKMA - Hong Kong monetary authority has been protecting the appreciation of the HKD by selling at or around 7.75.

I think it is clear to say from the chart below that the HKD wins the prize for most peculiar weekly chart, with huge spikes, crazy volatility and then prolonged periods of almost no change.

The HKD is primarily used a bridging currency for the Chinese Yuan, as China have strict currency controls it is difficult to buy or sell, so instead investors look to the HKD as a proxy for the CNY. This is why, the previous 4 times the HKD has traded at the low end of its allowed range there has been an appreciating CNY at the same time.

Unfortunately, it doesn't look like the CNY will open up any time soon so there will be demand for HKD so long as China is seen as a strong economy. For this reason there will be a tendency for the HKD to edge towards it 7.75 peg level.

Volatility has been incredibly low with the average rate of change over the past 50 periods being in the area of 0.03%. This combined with a 1 month historical volatility of 0.25% presents many opportunities for Volatility hedging. As it stands there is a slight reverse skew, suggesting pressures exist to the downside but on a 2y basis there is an extreme skew which suggests traders are protecting against, either a break of the 7.75 peg, or a move from a USD peg to a CNY peg.

The USDHKD has recently broken down below a short term daily trendline and suggests a further breakdown over the coming weeks, because of this I expect the UDSHKD to be at or around 7.7575 during July.

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