Hong Kong dollar firms 5-month high as investors unwind carry trades

[HONG KONG] The Hong Kong dollar strengthened to a five-month high on Thursday, with some analysts attributing the gains to profit taking as investors unwind lucrative "carry" trades ahead of the year-end.

Such trades involve borrowing in places with low interest rates, such as Hong Kong, to fund the purchase of potentially higher-yielding assets denominated in US dollars.

Also lending support, tensions in the Chinese-ruled city have cooled somewhat in the last few weeks, after six months of increasingly violent anti-government demonstrations.

The Hong Kong dollar firmed to 7.7980 per US dollar in morning trade, its strongest since July 8. It is pegged to the greenback at a tight range of 7.75-7.85 per dollar.

"The whole market has been long dollars and short Hong Kong dollars, given all of the negative events we've seen there over the last several months," said Stuart Oakley, global head of flow FX at Nomura in Singapore.

"I think a lot of those positions are being closed out or stopped out as people want to consolidate their positioning and reduce risk into the holiday season," mR Oakley said.

Global financial markets have also turned cautious ahead of a scheduled US tariff hike on Chinese goods on Sunday. If it is not postponed, it could torpedo Sino-US negotiations on a deal to defuse their long trade war.

Hong Kong's leader Carrie Lam said earlier this week that a reshuffle of the city's Cabinet is not an "immediate task", declaring her priority was to restore law and order.

Ms Lam will depart on Saturday for a regular visit to Beijing, where she will brief officials on the city's biggest political crisis in decades.

The Hong Kong Monetary Authority (HKMA) said on Thursday that the city's foreign exchange and money markets continue to operate smoothly.

It said a decision overnight by the US Federal Reserve to keep its policy interest rate unchanged had been expected by the market. Hong Kong's monetary policy moves in lock-step with that of the United States because of the currency peg.

"While Hong Kong dollar interbank interest rates will continue to be affected by changes in the supply and demand of Hong Kong dollar funding, the interbank market has been operating in an orderly manner," HKMA said in a statement.

"The Hong Kong dollar exchange rate has remained stable," , adding lending and borrowing activities were continuing as usual, notwithstanding recent large-scale fundraising activities.

REUTERS