With the creation of the BRICS bank a couple of weeks ago, and the implementation of more than 23 Yuan swap lines forged within the past year, a domino effect is beginning to appear across the global financial system, with nation after nation preparing for a shift away from the dollar, and towards a new monetary paradigm.
On July 28, the Hong Kong Monetary Authority (HKMA) began selling Hong Kong Dollars (HKD), while at the same time buying dollars, to balance out a new phenomenon where a massive increase in domestic and foreign purchases of Hong Kong’s currency has taken place. This swap was primarily done to ensure that the HKD does not strengthen too quickly, especially in light of how the HKMA’s balance sheet has increased by more than 21% in the last two weeks alone.
The special significance of the Hong Kong Dollar is that it has been pegged to a foreign monetary currency since 1935 when it moved away from a silver peg to follow in lock step with the former global reserve currency, the British Pound. However, beginning in 1983 the HKD detached itself from the Pound Sterling and began a new peg using the U.S. dollar, and has used this currency as its baseline for the past 31 years. But as global confidence in the Fed, the dollar, and the U.S.’s ability to manage monetary policies has waned, nations in the East are looking hard at the Hong Kong dollar as a viable alternative for greater monetary stability, and this growing trust is opening the door for the HKD to very soon completely disconnect itself from the dollar and stand upon its own.
The Hong Kong Monetary Authority bought $715 million (selling HKD) in the FX markets to manage its currency peg, injecting the money into the banking system (and expanding its balance sheet) to prevent HKD from rising above its permitted range. HKMA projects its balance sheet to grow to the end of July, but as Simon Black (of Sovereign Man blog) notes, this could well be the start of a bigger shift – an end to the US Dollar peg…”The US is no longer the undisputed superpower it once was. The US dollar is dragging them down. Hong Kong is easily strong enough to stand on its own.” – Zerohedge
Hong Kong has been one of the most important financial centers in the modern era, and especially in the East when the British set it up as a conduit for trade in their vast empire. And even during the tumultuous times of two World Wars, and changes in regional economic ideologies (China), Hong Kong’s independent nature has sustained it well, and has helped it become one of the world’s richest economies.
If the dollar’s dominance as the global reserve currency ended today, the Chinese Yuan would be the most agreeable alternative for the HKD, especially as their gold reserves assure a modicum of price stability with their international trade partners. And with the dollar devaluing at an ever growing rate thanks to the Federal Reserve’s monetary policies of QE and debt creation, Hong Kong stands to lose much less if it chooses to peg its currency with the Yuan, and disconnect from the dollar just as it ditched the Pound Sterling in favor of the U.S. currency three decades ago.