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Under the linked exchange rate system, HKD = D3 is fixed in a narrow range near HK$7.8. However, due to the intensification of turbulence, the Hong Kong dollar has been at the weak end of the range for several weeks, falling by 0.8% since the beginning of July.
The bets on the market show that some people believe that Hong Kong's pegged exchange rate system may be shaken. Can the Hong Kong dollar withstand the dumping pressure?
** Why is the Hong Kong dollar weakening? * *
Hong Kong is facing its first recession in a decade as China's economic growth slows, trade wars tense and protests intensify.
The Forex market shows that speculators are betting on the collapse of the pegged exchange rate system.
The 12-month forward of the Hong Kong dollar has recently exceeded the exchange guarantee range. The spread in the options market hit its broadest level in three years this month, favoring dollar call options. This suggests that investors are paying higher option prices to bet on the devaluation of the Hong Kong dollar.
"Forward trading shows that some people expect the Hong Kong dollar to break through the region," said Alicia Garcia Herrero, chief economist for the Asia-Pacific region of the French Bank of Foreign Trade (Natixis).
She points out that this is particularly unusual because it happens when the cost of interbank lending in Hong Kong rises above the US dollar interest rate, in which short selling is not attractive and the Hong Kong dollar is usually supported.

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