Opportunity: Park into HongKong dollars, HKD

Art, 18 Mar 2008

HKD is pegged to USD and as such, it has fallen significantly against all other currencies. While US is trending into recession and thus, it will cools its economy, on the other hand, HK economy has been growing strongly.

The weakened HKD currency will have inflationary effect and also weakens its financial reserve positions vis-à-vis other economies like Singapore. The inverse economic trends between US and HK will put HK in a monetarily disadvantaged position and it is not likely to be in HK interest to continue its HKD pegged to USD as their two economic paths are diverging.

As China and many emerging economies have successfully adopted the trade weighted currencies’ peg approach, HK will have to seriously consider similar move.

The advantages will be to tame the HK growing inflation while allowing more flexibility in monetary management. It also strengthens its national reserves and allows HK to adopt similar model of growth by setting up the Sovereign Wealth Fund, SWF and invest overseas for diversified growth portfolio.

Basic HK economic strengths;
1. stable government
2. efficient civil servants and organisations
3. gateway between West and China
4. hard working labor force
5. China as hinterland and
6. great weather, which thus, ensuring sound HK economic growth for a foreseeable future.

SGD has strengthen against USD significantly for quite sometime, from 1.52 to 1.37 (10% gain) over the last 6 months. With Singapore’s negative labor productivity growth in 2007, Singapore government will be concerned about its relative competitiveness. Coupled with skyrocketing rentals and high inflation, Singapore government would be reluctant to let SGD strengthen much further, thus intervention is likely, so as to maintain USD/SGD rate at possibly 1.35 level for the next 6 months.

In conclusion, the SGD/HKD is likely to be in HKD favor when HK choose to de-peg from USD and adopt a weighted peg against major trading partners’ currencies. The timing of such a move is a challenge as it will be a HK major monetary policy change, though I expect it to be within this year. If you should decide to do it, do it only after US FED cuts their interest rate tonight. Since the downside is low and the upward potential is significant (assuming HKD revalue to the RMB level, the gain is 11% within the short period), it would be a reasonable bet. Another small plus for HKD is that it pays higher interest than SGD.

I would like to remind my reader that this is purely a personal assessment of mine and I have to repeat, there is no guarantee in any financial positioning except to weighs the advantages and disadvantages of each decision. Another suggestion is not to put all eggs in one basket, that is, a measured diversified investment approach is preferable.

(If you are not familiar on how to go about taking a position in HKD/SGD, please email at artlim66@gmail.com and I will provide some possible steps of doing so)