Favourable capital flows manifested in strong HKD

It's expected to stay strong in 2H14.

The Hong Kong dollar (HKD) is expected to stay strong in H2 on capital flows and seasonal factors.

According to a research report from Standard Chartered, it forecasts USD-HKD at 7.75 at year-end.

Capital inflows to Hong Kong are likely to remain strong as investors position themselves for the impending launch of Shanghai-Hong Kong Stock Connect in mid-October, and also on renewed optimism towards China.

Here's more Standard Chartered:

There have been media reports of safe-haven demand for the HKD as a result of geopolitical tensions in Ukraine/Russia, but we expect this to be only marginally positive for the HKD.

USD-HKD remains very close to the 7.75 Convertibility Undertaking. The Hong Kong Monetary Authority (HKMA) has injected over HKD 75bn into the banking system since 1 July 2014.

The Aggregate Balance has risen to close to HKD 240bn but remains well below its peak of HKD 318bn in November 2009.

Secretary for Financial Services and the Treasury Chan Ka-Keung and the HKMA recently warned of the risk of a reversal of capital flows as the US moves towards its first rate hike.

We agree that this is a valid concern, yet renewed optimism towards China should partly offset such worries.