15 November 2023
It is no secret that the Hong Kong stock market has enjoyed a period of relative joy, working with Chinese counterparts and those overseas. Only last month, we saw the makings of a deal with Saudi Arabia, which will see dual listings for several companies. One of the often forgotten factors for international investors is currency, particularly the risk to capital and income.
Many people don't realise, but the Hong Kong dollar is pegged to the US dollar, which means that movement should be in line with the US dollar, with a slight degree of variation. This explains the strong relationship between US investors and their counterparts in Hong Kong, although the situation is a little different further afield.
Before we go any further, it is essential to realise that the Chinese Yuan was pegged to the US dollar between 1994 and 2005. Once the tie was removed, this allowed the government to micromanage currency movements, which are in a relatively narrow band. While not seen as a free-floating currency, it does float, but to a lesser extent than some other currencies.
The benefits of pegging your currency include:-
· Reduced volatility
· Reduced political risk
· Enhanced international trade
In essence, pegging your currency gives you greater visibility in the longer term.
As we touched on above, Hong Kong has become a global player when it comes to investment and a very prominent player in new areas such as ESG, crypto assets and FinTech. So, we thought it might be interesting to look back over the last ten years and identify fluctuations between the Hong Kong dollar and a host of leading currencies.
US dollar - current rate HK$7.80952
To put this into perspective, over the last ten years, the US dollar exchange rate to the Hong Kong dollar has moved between HK$7.74923 and HK$7.86969. It's not a massive movement by any stretch of the imagination!
UK pound - current rate HK$9.56214
The situation with the UK pound is a little more volatile, with sterling weakening by 23.48% over the last ten years. The range has been from HK$8.42036 to HK$13.2995, with the current rate towards the lower end.
Euro - current rate HK$8.34848
It has been a similar scenario for the euro, falling by 20.23% against the Hong Kong dollar over the last ten years. The range has been from a low of HK$7.53282 to a high of HK$10.8189, with the current rate very much towards the lower end.
Japanese Yen - current rate HK$0.0514638
Over the last 40 years, the Japanese economy has experienced significant volatility and deflation, which have considerably impacted the currency. In the previous ten years, it has experienced a 33.51% fall against the Hong Kong dollar with a range of HK$0.0514349 to HK$0.0776206. The current rate is just above the 10-year low, but this comes at a time when Japan is rumoured to be on the verge of an economic recovery.
While movement against the US dollar has been limited due to the pegging, the same cannot be said of the pound, euro or the yen. However, there are significant currency gains for those who switched from these currencies to the Hong Kong dollar 10 years ago, even if their Hong Kong investments remained unmoved. Over this time there have been periods where investors would have made a turn on their domestic currency, but the 10-year trend has definitely been downward.
The impact of currency rates is often underestimated by international investors, although, as we can see above, it can be significant. In this scenario, the Hong Kong dollar has been much more robust than the pound, euro and the yen, mainly due to a strong dollar. It's safe to say there's a lot to consider when looking at international investment!Back to News