Exchange Rates : Pound HK Dollar Rate Drops as China Alters Policy

February 17, 2011 - Written by John Cameron

STORY LINK Exchange Rates : Pound HK Dollar Rate Drops as China Alters Policy

The Chinese Yuan made gains during yesterday’s overnight session after the Chinese Government set their US Dollar/Yuan parity rate at a record low of 6.5800. This caused broad support for the Hong Kong Dollar as traders continued to use it as a proxy for the state-controlled Yuan. The HK Dollar rallied from 12.60 to touch 12.50 against Sterling during yesterday's session, as the markets factored in the change in Chinese economic policy, although the HK Dollar has given up some of these gains today.

It is expected that the US Government will continue to lobby Chinese policy-makers to allow the Yuan to strengthen in order to improve American terms of trade with China, which would further benefit the HK Dollar.

The Hong Kong Dollar was also bolstered by a positive day for the Hang Seng Index, which closed 0.6% up on the session. This upward move was partially driven by rumours that HSBC are set to release positive results for 2010. HSBC’s shares gained 2.1% on the day.

Interest rates in Hong Kong remain at ultra-low levels and are expected to do so for the foreseeable future. However, with rates currently standing at 0.5%, there is no prospect of Hong Kong’s central bank making any further cuts, so effectively the current levels on the HK Dollar are fully factoring in the bad news on interest rates.

The HK Dollar also garnered some support earlier in the week with the release of Chinese CPI Inflation figures which showed that inflation in China was running at a lower than expected level in January. However, some of the more cynical analysts pointed out that the equation for calculating CPI has been altered by the Chinese Bureau of Statistics since the December figure in order to give less weight to the inflationary effects of food prices. However, if it transpires that the current Chinese rate-hiking cycle has come to a halt, the HK Dollar may make further gains.

With the HK Dollar pegged at between 7.75 and 7.85 against the US Dollar and trading at 7.788 on the wholesale market today, there is some prospect for near-term upside, particularly if US policy-makers continue to aggressively petition Chinese authorities to permit further Yuan strength.

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