2024 RT Amination Banner.gif

China Daily

News> Hong Kong> Content
Monday, December 16, 2019, 23:33
Capitulating bears drive HK dollar's best run since 2014
By Bloomberg
Monday, December 16, 2019, 23:33 By Bloomberg

Hong Kong one-hundred dollar banknotes are arranged for a photograph in Hong Kong, April 15, 2019. (PAUL YEUNG / BLOOMBERG)

Hong Kong dollar bears are abandoning their short bets, stoking the currency’s longest rally in more than five years.

The Hong Kong dollar rose as much as 0.13 percent to 7.7867 versus the greenback on Monday, nearing its strongest level since mid-2017

The currency rose as much as 0.13 percent to 7.7867 versus the greenback on Monday, nearing its strongest level since mid-2017. Supporting the advance are bets that borrowing costs will remain elevated versus falling US dollar rates, as banks hoard cash for year-end regulatory checks. An easing of trade tensions between China and the US has also helped, with foreign funds snapping up stocks in Hong Kong.

ALSO READ: Hong Kong's dollar jumps into strong half of its trading band

It’s all sounding the death knell for the Hong Kong dollar carry trade, a once-popular strategy that had in the past two years repeatedly pushed the currency to the weak end of its band. While hedge funds profited and forced the Hong Kong Monetary Authority to defend the peg, its legacy is a volatile local dollar that is increasingly vulnerable to shifts in demand for cash. The city’s shrinking interbank liquidity pool means large share sales and window dressing cause spikes in interest rates and dramatic moves in the currency.

“The currency is benefiting from the unwinding of short positions and capital inflows into the stock market,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. Still, “it will fluctuate between 7.78 and 7.82 in the coming three months without touching either side of its trading band because interest rates won’t fall sharply next year and the inflows won’t be sustainable.”

While the Special Administrative Region (SAR) keeps its currency on one of the world’s tightest leashes, the Hong Kong dollar is no stranger to painful stampedes. On Sept 21 last year, the exchange rate suddenly surged 0.6 percent — the most in 15 years — for no apparent reason apart from mildly higher borrowing costs.

ALSO READ: Hong Kong dollar trading almost as busy as yuan this year

Some signs of tighter liquidity are appearing now. The Hong Kong dollar’s one-month interbank funding costs, known as Hibor, jumped 9 basis points to 2.6 percent Monday, the highest level in a month. But the key factor supporting a year-end rally this time is the gap between local interest rates and those for the US currency. Traders earned more on Hong Kong dollar assets versus those denominated in the greenback for 27 sessions as of Friday — the longest stretch in four years.

The Hong Kong dollar rate has been elevated since last month, with the premium over its US counterpart briefly touching the highest since the 1990s. That came as Chinese e-commerce giant Alibaba Group Holding Ltd prepared to list in the city, mopping up liquidity as investors set aside cash to buy the shares.

Months of unrest stemming from the extradition bill incident are also complicating the situation in the money and currency markets, according to Cliff Tan, head of global markets research for East Asia at MUFG Bank Ltd. That could offset some fund inflows, he said.



Share this story

CHINA DAILY
HONG KONG NEWS
OPEN
Please click in the upper right corner to open it in your browser !