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Hong Kong dollar scores best month since 2003 as local rates hold up

[HONG KONG] The Hong Kong dollar recorded its biggest monthly jump in more than 16 years in March, as local interest rates firmed on surging demand for cash, luring speculators to hold the currency.

The Hong Kong dollar rose over 0.5 per cent month-on-month, the biggest advance since September 2003 and a sizeable move within its tight trading band of 7.75-7.85 per US dollar. The currency reached a four-year top of 7.7510 on Friday.

Hong Kong's widening interest rate advantage over the US was the main driver behind its currency's gain, analysts in the city said, as the US Federal Reserve slashed interest rates to limit the economic damage from the coronavirus pandemic.

The one-month interbank rate in Hong Kong led its US counterpart by 107 basis points, the most since 2008, last Thursday. Hong Kong also held a 97 basis points lead in the one-year rate earlier this month, the highest in two decades.

This allowed for "carry trade" — where traders borrow with low US dollar interest rates to buy the Hong Kong currency, said Iris Pang, chief economist for Greater China at ING.

"The interest rate spread started turning (in HKD's favour) late last year but it was quite unstable ... Now with the Fed on unlimited QE (quantitative easing) and Libor in decline, it provides the speculators with a very comfortable bet," she said, referring to the Fed's policy easing and fast falling US dollar rates.

By contrast, demand for cash increased and interest rates rose in Hong Kong as quarter-end "window dressing" - banks beefing up balance sheets to meet regulatory requirements - approached, said Carie Li, economist at OCBC Wing Hang Bank.

Inflows from mainland China into the city's stock market, for cheap shares and upcoming dividend payments, also aided Hong Kong dollar's advance, said Bruce Yam, forex strategist at Everbright Sun Hung Kai, a local brokerage.

Mainland investors bought net HK$139 billion (S$25.53 billion) of Hong Kong shares in March through the Stock Connect trading link, a record high, according to Reuters' calculation based on Hong Kong Exchanges and Clearing's data, as prices of Hong Kong-listed "H-share" Chinese companies lagged mainland-listed A-shares the most in two years.

However, April may prove to be a less promising month as the currency is close to its strong-side trading limit and as the seasonal effect is likely to subside.

"There is only so much profit margin from here to 7.75," said Edison Pun, senior markets analyst at Saxo Capital Markets.


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