Trading The Hong Kong Dollar: What To Know

Hong Kong is one of those places where East meets West. Located in southeast China, it was a British colony for 150 years but now belongs to China, building a unique bond. Even Hong Kong’s currency is called the Hong Kong dollar (HKD). Trading the Hong Kong dollar may be more familiar to Asian traders but surely it is not so popular as major currencies that are traded daily in the global market. However, Hong Kong’s economy is resilient with the city remaining one of the economic power hubs in the Asian continent.

In this blog, we will share some interesting insights regarding trading the Hong Kong dollar and how it is affected by the implemented economic policies.

The Hong Kong Dollar (HKD) And The Hong Kong Economy

As mentioned earlier, Hong Kong was a British colony from 1841 to 1997. The UK government agreed to transfer the entire territory to China upon the expiration of the New Territories lease in 1997. As a result, Hong Kong became a special administrative region (SAR) until at least 2047. Some say that Hong Kong is the place where Chinese life values meet western ideas for economic liberty and legislation.

According to a report published by Reuters, Hong Kong’s government revised its growth forecast for 2023 from an earlier 3.5-5.5% to 4.0-5.0%. Government economists said in the accompanying statement that the difficult global economic environment would continue to affect exports, but "inbound tourism and private consumption will remain the major drivers of economic growth for the rest of the year."

Analysts at the International Monetary Fund (IMF) suggested that, while during 2022 the economy stalled, 2023 is expected to be a year of growth. The IMF report notes: “The economic recovery in Hong Kong SAR stalled in 2022 following a major COVID outbreak and U.S. monetary policy tightening. But in 2023, real GDP is projected to grow by 3.5 percent. With moderate wage pressure, CPI inflation is expected to gradually rise to about 2¼ percent by the end of 2023.”

Established in 1993, the Hong Kong Monetary Authority (HKMA) is the central banking institution of Hong Kong. The HKMA’s main goals are to maintain currency stability within the framework of the Linked Exchange Rate System, promote the stability and integrity of the financial system and help to maintain Hong Kong's status as an international financial centre.

The Hong Kong dollar is the official currency of Hong Kong. Currency in Hong Kong is issued by the government and three local banks under the supervision of the HKMA. The Hong Kong dollar is pegged to the US dollar in an arrangement that dates back over 40 years. What some of you may not know is that the Hong Kong dollar is also used in neighbouring Macau as it is pegged to the Macanese pataca (MOP).

What Do Analysts Think About The Hong Kong Dollar's Performance

When it comes to performance, the Hong Kong dollar has had a rough time in the last weeks. In August, the Hong Kong currency lost 0.6% of its value against its US counterpart. This was the worst monthly performance recorded in the last 38 years. Interest rates in Hong Kong have been on the rise as its monetary policy moves in line with the U.S. Federal Reserve, as its currency is pegged to the U.S. dollar.

Hong Kong’s Hang Seng index, one of the most popular indices among traders, also suffered significant fluctuations in the first half of the year. Some economists suggest that a Chinese economic rebound could help the index recover lost ground in the second half of the year.

Economists at ANZ Bank suggest that the Hong Kong dollar could act as reserve currency amid de-dollarisation. In their report, they note: “Pegging HKD to the RMB does not add value to China’s development as there is already a CNH market. Instead, HKD is a reserve currency candidate backed by solid financial infrastructure and freely convertible exchange rate regime. The HKD peg is akin to a ‘stable coin’ as its value is tied to a reference asset. Blockchain technology and the tokenisation of government bonds will increase the security qualities and make it more attractive to investors who seek diversification from the conventional dollarised regime in the digital era.”

Commenting on the Hong Kong dollar’s performance and calls on Hong Kong to peg the country’s dollar to the Chinese renminbi (RMB), economists at BNP Paribas wrote in a report: “There are calls on Hong Kong to ditch the US dollar and switch to a peg against the RMB. Despite Hong Kong’s increasing economic integration with mainland China, this does not appear to be an advisable alternative at this point because the HKD is a hard currency under an open capital account while the RMB is a soft currency under a closed capital account. A HKD-RMB peg also means that Hong Kong would have to follow China’s monetary policy, a move that would not be credible for retaining international confidence before China’s monetary policy management matures.”

Trading The Hong Kong Dollar (HKD) And Risk Management

The Hong Kong dollar is one of the strongest currencies in Asia as Hong Kong is famous for the high-quality financial services that is able to provide and its resilient economy. Trading the Hong Kong dollar comes with risks that beginner traders should not ignore. Large loss of funds may occur in the least amount of time so being prepared is the only solution if you don’t want to jeopardise your available budget and financial goals. 

Learning how to trade and deepening your knowledge of risk management tools is imperative. Brokers offer a wide array of educational tools to help you upgrade your trading techniques. Webinars, e-books, blogs, guides are at every beginner trader’s disposal. This is the best way to learn the fundamentals of trading before engaging in actual trading.

Trading without risk management is an endeavour that beginner traders should not take on as it could expose them to financial danger. Popular trading platforms come equipped with risk management tools that can make a difference when markets move against your strategy and targets. Learning how to use the stop-loss order or any other similar tool is going to save you some stress and let you enjoy trading while you minimise fund losses. Never forget that knowledge is one of the keys to a successful strategy.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.