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[BEIJING] Hong Kong's dollar is shedding its image as one of the world's most boring currencies.
As swings in the pegged exchange rate increase to the highest level in six months, traders are piling into wagers that stand to benefit from further volatility.
The notional value of outstanding Hong Kong dollar options has swelled to about US$103 billion from US$73 billion at the start of the year and expectations for future price swings in the currency are jumping at the fastest pace worldwide.
While there's no indication that the Hong Kong Monetary Authority will abandon the currency's trading band of 7.75 to 7.85 per US dollar, the de-facto central bank has rattled market participants with two surprise moves to drain cash from the financial system in the past six weeks.
The actions have triggered sudden spikes in the currency, disrupting its steady drift toward the weak end of its trading band.
Forecasters say volatility is likely to stay elevated as traders grapple with the prospect of further HKMA action and interest-rate increases in the US.
"The market has grown more unsure about the future now, so the volatility could remain high as options trades continue to gain popularity," said Irene Cheung, a currency strategist at Australia & New Zealand Banking Group in Singapore.
Hong Kong's dollar and Israel's shekel are the only major currencies tracked by Bloomberg this year to show an increase in one-month implied volatility, a gauge of projected swings derived from options prices.
Expectations for Hong Kong dollar volatility are near the highest since March 2016, even though they're still low by global standards. The currency has gained about 0.3 per cent in September, paring this year's drop to 0.6 per cent.
"The uncertainties are still lingering," said Christy Tan, head of markets strategy and research for Asia at National Australia Bank.
"Volatility may stay elevated."
While the HKMA's bill-sale plans have supported the Hong Kong dollar, the exchange rate still faces pressure to weaken because the city has lower borrowing costs than America.
Rates in Hong Kong are near the cheapest since 2008 versus those in the US, which means it's still lucrative for traders to borrow in Hong Kong dollars to buy the greenback.
The Hong Kong currency slipped 0.04 per cent to 7.8042 per dollar at 9.19am local time after HKMA deputy chief executive Eddie Yue told reporters that the city's exchange rate could depreciate to 7.85 per dollar over time.
"The Hong Kong dollar will weaken again," said Carie Li, an economist at OCBC Wing Hang Bank in Hong Kong.
"At least in the near term, there's still incentive for investors to bet against the currency with options."