The Hong Kong dollar has been struggling, with the currency falling to an 18-month low against the U.S. dollar to which it is pegged in a tight range.
The South China Morning Post has taken a look at what is troubling the HKD:
The Hong Kong dollar has been the worst performer among Asia’s 11-most traded currencies in the past month, according to Bloomberg data.
Under the linked exchange rate system, the Hong Kong Monetary Authority (HKMA) is obliged to prevent the currency from breaching either side of a trading band between 7.75 and 7.85.
In the current situation, it would sell US dollars and buy Hong Kong dollars to reduce interbank liquidity and raise Hong Kong dollar rates in order to curb depreciation pressure.
Historically however, the HKMA doesn’t wait for the currency to reach the 7.85 lower limit of the trading band before defending the peg, and may prefer intervening in currency markets pre-emptively to avoid panic among financial investors.
Source: SCMP