Demand for carry trades is pushing the Hong Kong dollar toward the weak end of its trading band against the greenback.

Four times as many US dollar-Hong Kong dollar call options were traded compared to puts on Wednesday, according to data from the Depository Trust and Clearing Corp based on contracts valued at $100 million or more. Call options gain in value if the currency pair advances, while puts rise if the opposite occurs.

“We continue to see demand for short-dated US dollar-Hong Kong dollar call options given the carry is still attractive,” said Nathan Sinclair, head of foreign-exchange options Asia at Crédit Agricole CIB in Hong Kong. “Less demand has been seen for longer-term tenors.”

The Hong Kong dollar ended Wednesday little changed at HK$7.8409 to the US currency even as the greenback weakened versus most of its major peers after the Treasury said it was increasing buybacks of longer-maturity debt. That kept the local currency within striking distance of HK$7.85, the weakest level permitted under Hong Kong’s linked exchange rate system, which it last touched a year ago.

Higher interest rates in the US are encouraging traders to keep buying the greenback against its Hong Kong counterpart. The one-month US secured overnight financing rate currently stands at about 3.65 percent, versus Hong Kong’s similar-maturity interbank offered rate of about 2.63 percent.

This means that investors can earn a profit, or carry, from the differential, by selling the Hong Kong dollar and buying the greenback. The currency risk of doing so is limited by the managed trading band for the Hong Kong dollar of HK$7.75 to HK$7.85.

“The US dollar-Hong Kong dollar’s interest-rate differential is still attractive under the low volatility circumstances,” said Bosco Wu, a strategist at Bank of East Asia Ltd in Hong Kong.

Taking profits

Still, the Hong Kong dollar’s proximity to the weak end of its trading band has prompted some investors to take profit, which has seen the currency pare some of its declines over the last week.

“We’ve seen some investors trimming long US dollar-Hong Kong dollar positions as the currency pair approaches the top end of the trading band,” said Nathan Swami, head of foreign-exchange trading for Asia Pacific at Citigroup Inc in Singapore.

“This appears to be driven partly by profit-taking, with some participants looking to re-establish positions on any pullback,” he added.

Despite the pair’s recent retracement, the risks still remain skewed toward it rising to HK$7.85 in coming weeks given that overall positioning is biased toward further gains.  

The profit-taking “flows appear largely tactical, and positioning remains broadly long the pair given the continuing carry dynamics,” said Ivan Stamenovic, head of Asia Pacific Group-of-10 currency trading at Bank of America Corp in Hong Kong.