Fundamental: The Hong Kong dollar weakened to 7.7803 to the U.S. dollar, the lowest level since late June, led by corporate demand for the greenback and interest rate differential trades. One year rates were quoted at 4.38/4.41 percent which favors selling Hong Kong dollars for U.S. dollars to take advantage of interest rate differential. Since 17 October 1983 the Hong Kong dollar has been pegged to the U.S. dollar at HK$7.80 but the exchange rate is allowed to fluctuate between 7.75 and 7.85 to the U.S. dollar. One of the objectives of the restricted range is to avoid the HK dollar being used as a proxy for speculative bets on the Chinese Yuan.
Last week, a government report showed that retail sales unexpectedly rose 7.1 percent in July as rising wages accelerated personal consumption. This was the biggest gain since April and reflects that household spending is becoming a significant force behind economic growth. Thursday, the Hong Kong Monetary Authority announced that the official foreign currency reserve assets of Hong Kong rose to $128.9 billion at the end of August 2006. Monetary authorities use a currency board system that ensures that Hong Kong's entire monetary base is backed with U.S. dollars at the linked exchange rate. U.S dollar reserves are kept on the Hong Kong's Exchange Fund and are among the largest official reserves in the world.
Next week, the Hong Kong dollar is likely to continue to trade within a narrow range. The Unemployment Rate for August is expected to remain unchanged at 4.9 percent which is a 5 years low. The consumer price index is widely expected to increase to 2.4 percent from 2.3 percent in July.
Technical: The USDHKD is currently just above the triple top from the 8/8, 8/15, and 8/25 highs at 7.7800/02. A daily close above exposes monthly pivots of 7.7817, 7.7860 and 7.7904. The technical picture is clouded as tight Bollinger bands on the daily favor a breakout but bearish divergence with daily oscillators warrant a cautious approach. If prices fall back into the 7.7760-7.7800 range, then the 9/12 low at 7.7778 is initial support.
Al Bawaba
