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Hong Kong dollar surges most in 1-1/2 years, boosting developers

[HONG KONG] The greenback's slide is proving too much for even the pegged Hong Kong dollar, which is heading for its biggest two-day gain against the US currency since Jan 2016.

Hong Kong's dollar jumped 0.12 per cent to HK$7.8037 against its US counterpart on Friday as of 11.07am local time, after strengthening 0.15 per cent on Thursday.

Expectations that local rates can stay low for longer after the currency's rebound boosted property developers, with a gauge of the sector's stocks soaring to the highest intraday level since Dec 2007.

A gauge of US dollar strength dropped for a seventh straight day on Friday to extend a 2-1/2-year low as investors braced for damage that Hurricane Irma may inflict on Florida, while expectations for US rate rises remained muted amid signs of monetary tightening by other major central banks.

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The Hong Kong dollar's advance was amplified as the greenback's slide prompted traders to unwind short positions on the city's currency.

"The surge in Hong Kong dollar resulted from a quick slide in the dollar," said Carie Li, an economist at OCBC Wing Hang Bank Ltd in Hong Kong.

"The moves have been sharp because some short Hong Kong dollar stop-loss trades were triggered in the past two days. The rally is not sustainable, as cash supply in Hong Kong is still flush."

The sharp rebound marks an abrupt reversal for the local exchange rate, which depreciated for most of this year as the gap between US and local interest rates widened, making the city's assets less attractive.

Hong Kong dollar forwards that settle in 12 months were at HK$7.7486, outside the spot rate's permitted trading band of HK$7.75-HK$7.85 against the greenback.

Trading volume in Hong Kong dollar options soared on Thursday, with US$2.8 billion of transactions, according to Depository Trust & Clearing Corp. figures. The pair was the fifth most-traded globally, the data show. One-month implied volatility climbed 44 basis points Friday to 1.39 per cent, the highest since March 2016.

Hong Kong's dollar has also been supported by stronger southbound inflows through equity links with the mainland, OCBC's Ms Li added. Chinese investors' net buying of Hong Kong stocks reached the highest since May on Thursday, data compiled by Bloomberg show.

Before this week's rally, the Hong Kong dollar's continuous decline had fueled concern it would reach HK$7.85, forcing the monetary authority to buy the currency, pushing up rates. Property stocks surged on Friday as expectations for such a scenario have receded, said Sam Turner, head of sales trading at Forsyth Barr Asia Ltd in Hong Kong.

Henderson Land Development Co led gains in the Hang Seng Index, soaring as much as 8.1 per cent to an intraday record. New World Development Co and Sino Land Co both advanced more than 6 per cent, as the property gauge jumped 3 per cent.