Will the USDHKD peg be removed? We investigate as FX firms begin leverage restrictions

A very close eye has been kept on potential factors which could create high volitility and reduce liquidity recently, especially in the aftermath of the Swiss National Bank’s removal of the 1.20 peg on the EURCHF last year. Today, as the possibility of the abolition of the USDHKD peg looms, Dukascopy has taken the initial […]


A very close eye has been kept on potential factors which could create high volitility and reduce liquidity recently, especially in the aftermath of the Swiss National Bank’s removal of the 1.20 peg on the EURCHF last year.

Today, as the possibility of the abolition of the USDHKD peg looms, Dukascopy has taken the initial precautionary step of reducing the maximum leverage on the pair, citing the potential high volatility and resultant low liquidity that may ensue should this action be taken by Hong Kong’s central bank.

Although officials in Hong Kong have dismissed the possibility, many speculators and analysts have opined that the 44-year peg to the dollar may come to an end.

In order to mitigate risk should due to what Dukascopy Bank sees as an increasing risk of significant price gaps, which may cause negative equity on client accounts, Dukascopy Bank and Dukascopy Europe will implelemt the reduction of maximum leverage for exposures on USD/HKD to 1:10 as of 9 March 2016 at 11:00 GMT.

In 1972, the Hong Kong dollar was pegged to the U.S. dollar at a rate of HK$5.65 = US$1. This was revised to HK$5.085 = US$1 in 1973.

Between 1974 and 1983, the Hong Kong dollar was floated. On 17 October 1983, the currency was pegged at a rate of HK$7.8 = US$1, through the currency board system.

As of 18 May 2005, in addition to the lower guaranteed limit, a new upper guaranteed limit was set for the Hong Kong dollar at HK$7.75 to the US dollar. The lower limit was then lowered from 7.80 to 7.85 (by 100 pips per week from 23 May to 20 June 2005). The Hong Kong Monetary Authority indicated at the time that this move was intended to narrow the gap between the interest rates in Hong Kong and those of the United States. A further aim of allowing the Hong Kong dollar to trade in a range is to avoid the HK dollar being used as a proxy for speculative bets on a renminbi revaluation.

Currently Hong Kong holds $358.8 billion in FX reserves, putting it in the top 10 among all countries worldwide, and marking Hong Kong out as a very important institutional trading center for Asia, as well as a place for western firms to base their operations in order to approach the mainland Chinese and South East Asian markets.

Indeed, in the past, certain investors have attempted to break the peg on the USDHKD with one very memorable example being George Soros’ Quantum Fund.

In 1992, the Quantum Fund rose to fame for for ‘breaking’ the Bank of England, forcing it to devalue the pound. Mr. Soros had bet his entire fund in a short sale on the ultimately fulfilled prediction that the British currency would drop in value, a coup that netted him a profit of $1 billion, also known as Black Wednesday.  In 1997, Mr. Soros was blamed for forcing sharp devaluations in Southeast Asian currencies, in particular with relation to the peg on the USDHKD.

Taking the lead among FX brokerages to implement preventative measures against such a potential occurrance, Dukascopy is advising its traders to estimate their margin usage at the moment that the leverage reduction on USD/HKD will be applied and adjust their exposure if needed.

The company has stated that for all accounts where there is no such USD/HKD exposure the lower maximum leverage will be applied today, 3 March 2016 after 14:00 GMT.

The question is, will this become the Black Swan of the Far East?

Photograph: Wan Chai, Hong Kong. Copyright FinanceFeeds

Read this next

Crypto Insider

Gate.io lists DeFiChain’s DFI token amid growing popularity

Bitcoin-based DeFi platform DeFiChain announced the listing of its native DFI token on Gate.io, one of the world’s leading cryptocurrency exchanges.

Digital Assets

Binance in discussions with Japan regulators to relaunch operations

Binance, the world’s largest crypto exchange by traded volume, is reportedly seeking a license to operate in Japan after its exit from the country four years ago.

Digital Assets

OKX Chain integrates .crypto domains to simplify wallet transactions

Unstoppable Domains, a company building Blockchain domain names, has entered a partnership with EVM and IBC compatible chain OKC (OKX Chain). This collaboration will grant OKC’s users the ability to simplify deposits and withdrawals within the regulated fiat-focused crypto-asset exchange.

Retail FX, Technology

MetaTrader’s iOS issue opens brokers’ eyes to other trading platforms

In a surprising (or-not-so-surprising) move, Apple has removed MetaTrader 4 and MetaTrader 5 from its App Store in a huge blow for the leading FX trading platform provider.

Retail FX

Pepperstone adds Capitalise.ai analytics and automated trading tools free of charge

“We look forward to bringing significant value to Pepperstone traders and making a real, positive impact in their daily trading habits. We are excited to welcome them on board.”

Retail FX

FP Markets wins Best Global Value Broker for 4th consecutive year at the 2022 Global Forex Awards

“We greatly appreciate the continued international recognition as at FP Markets we pride ourselves on these attributes and these prestigious awards are testament to the hard work from our global team to always provide our clients with the ultimate trading experience.”

Inside View

How to Engage Your Customer at Every Stage of Their Journey

As many as 89% of successful businesses say that providing assistive customer experiences is critical to their growth. That’s because a mere 5% increase in customer retention can boost profits by 25% to 95%.

Industry News

CFTC fines Chinese firms Chinatex and COFCO $720,000 for wash trading

Chinatex traders engaged in wash trading in order to liquidate a long position in the account of an affiliated company and re-establish the position in its own account, to the ultimate benefit of its parent company, COFCO.

Industry News

US-based operation of Brazilian broker XP fined $500,000 for recordkeeping failures

“Proper recordkeeping is vital to protecting our markets and market participants from fraud and manipulation. This case serves as another example of the Commission’s intent to vigorously enforce the recordkeeping obligations of its registrants.”