Hong Kong Dollar Jumps Into Strong Half of Band, Hurting Shorts

(Bloomberg) -- Hong Kong's dollar punched into the strong half of its trading band for the first time since September, riding on momentum provided by elevated borrowing costs in the city.

The currency climbed as much as 0.19% to 7.7987 a dollar on Tuesday, crossing the 7.8 threshold. Local interbank rates remain near a decade high, outstripping the income a trader can expect on U.S. dollars. That's undermining a carry trade -- sell Hong Kong dollars, buy greenbacks -- that had been profitable for years.

The tight liquidity is coinciding with dramatic street protests, just like last month, when the surge in borrowing costs suddenly accelerated. But market watchers see other reasons for the trend: companies are hoarding cash to pay quarterly dividends and at least two large share sales may lock up funds.

“These tightening events will keep market players cautious and prompt them to continue hoarding cash,” said Carie Li, an economist at OCBC Wing Hang Bank Ltd.

Rates are likely to remain elevated in July, Li said. By contrast, U.S. interest rates are dropping as the Federal Reserve prepares to ease monetary policy.

Li said one- and three-month interbank lending rates, known as Hibor, are likely to stay above 2% in July. One-month Hong Kong dollar Hibor was at 2.49% on Tuesday and the three-month rate was 2.44%, dipping slightly from last week. Hong Kong's financial markets were shut for a holiday Monday.

The Asia-Pacific arm of Anheuser-Busch InBev is offering shares in a proposed Hong Kong listing that could raise as much as $9.8 billion. Alibaba Group Holding Ltd. is also said to have filed for a share sale that could raise as much as $20 billion -- which would make it the financial hub's biggest since 2010. This squeezes liquidity as investors set aside cash for a chance to own a piece of the world's biggest brewer or China's largest company.

The Hong Kong dollar carry trade was a steady winner for years as investors borrowed the currency cheaply to invest in higher-yielding American assets. It became less of a sure thing after the Hong Kong Monetary Authority started buying the local dollar to defend the peg from April 2018.

March: What's Pulling at the Hong Kong Dollar's Peg: QuickTake

The city's aggregate balance now stands at just HK$56 billion, down from HK$180 billion before the HKMA began intervening. The HKMA, which effectively imports U.S. monetary policy, said in June that a higher Hibor and a stronger local dollar are “consistent” with the currency peg system, though uncertainty over the Fed's policy was increasing.

Eddie Cheung, an emerging-market strategist at Credit Agricole SA in Hong Kong, says the currency's strength won't last.

“The liquidity will likely come back in July and August as seasonal factors wane, though large IPOs may trigger temporary spikes in Hibor,” he said. “It's challenging to see a near term driver for strong inflows into the local equity market."

--With assistance from Tian Chen and Philip Glamann.

To contact Bloomberg News staff for this story: Claire Che in Beijing at yche16@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Will Davies

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With assistance from Bloomberg