FXStreet (Delhi) – Research Team at Nomura, suggests that there are increasing concerns over the sustainability of the USD/HKD peg, known formally as the Linked Exchange Rate System (LERS), within the current convertibility undertaking of 7.75-7.85. Key Quotes “Some of Hong Kong’s fundamentals remain solid (e.g., improved FX and fiscal reserves, a low bank loan-to-deposit ratio and a flexible domestic price-adjustment mechanism), but others (e.g., credit-driven property market overvaluation, heavy exposure to China, the highly leveraged financial system) are cause for concern, in our view. We believe that Hong Kong has the ability to use policy to respond effectively to domestic-specific risks as there is room to increase fiscal support for household income and unwind macroprudential measures if the property market corrects sharply. But, a sudden, massive depreciation of Asian currencies (notably RMB) associated with a steeper Fed hiking path would appreciate the real effective HKD to an extremely overvalued level, while large-scale capital outflows would push Hibor to an uncomfortable level (not our base case). In this low probability/high risk scenario, the Hong Kong Monetary Authority (HKMA) would face a dilemma – to maintain the peg amid higher local interest rates, or adopt new FX policy options to allow HKD depreciation. Barring these risks, Hong Kong should maintain its monetary stability (our base case), but we do see downside risks to our 2.3% GDP growth forecast for 2016.” For more information, read our latest forex news.