On Monday, the US Dollar traded as high as HK$7.8218 setting the Hong Kong currency on course for its weakest daily level in ten years. The Hong Kong currency’s weakness is the result of the excess liquidity in the territory’s banking system. While the Hong Kong Monetary Authority has tracked the US Federal Reserve in raising interest rates, high levels of cash mean local banks have not needed to follow suit.
The gap between benchmark money market rates in the two countries reached its highest since the days following the collapse of Lehman Brothers in 2008. Three-month US Dollar Libor was quoted at 1.312% while its equivalent in Hibor offered 0.753%
Meanwhile, the Renminbi firmed after the Chinese Central Bank fixed the currency slightly firmer to the Dollar. This came after data showed the country had fixed its capital outflows problem, with Forex reserves rising for a sixth straight month in July. Data indicated that China ran a $16bn surplus over the first half of this year, excluding Central Bank intervention, compared with a $417bn deficit in 2016. The figures also showed that China added to its foreign exchange reserves on a valuation-adjusted basis in Q2 for the first time since early 2014.
On Tuesday, the Dollar slightly fell early but maintained most of the gains it made on last week’s robust employment data that kept hope alive that the Fed could still increase interest rates this year. Meanwhile, comments from St. Louis Fed President Bullard and Minneapolis Fed President Kashkari had a muted impact on the greenback. Bullard said that the Fed could leave interest rates where they are for now because inflation is not likely to rise much even if the US job market continues to improve.