The Hong Kong dollar strengthened against the greenback on Tuesday. It approached the Strong-side Convertibility Undertaking of the Linked Exchange Rate System for the first time since 2016.
Carry trade is a strategy of selling lower-yielding US dollars for Hong Kong dollars.
The Hong Kong dollar on Tuesday rose to 7.75 per US dollar as the Hong Kong Monetary Authority reduced the amount of Exchange Funds Bills being issued by HK$5 billion (US$641 million) in four installments. As a result, the aggregate balance of Hong Kong’s banking system rose to HK$59.1 billion the same day.
However, the one-month HIBOR (Hong Kong Interbank Offered Rate), the benchmark for determining the city’s mortgage loan rates, rose to 1.589 percent while three-month HIBOR fell to 1.867 percent by Tuesday. This is despite the level of liquidity being reduced by the amount of Exchange Fund Bills now being issued.
“We expect carry trade will drive the currency pair all the way down to 7.75 and trigger intervention by the HKMA. This coupled with the reduction in the amount of Exchange Fund Bills being issued will push up the aggregate balance and in turn guide HIBOR down lower. One-month HIBOR is expected to edge down to 1 percent,” OCBC Wing Heng Bank Economist Carie Li predicted.
“Nonetheless, any inflows associated with carry trade are expected to be moderate. In other words, not until the global economy returns to normal will we see significant capital inflows to the city or a substantial drop in Hong Kong dollar rates. As such, one-month HIBOR may not easily drop below 0.5 percent in the near term,” Li added.
