Unstoppable Hong Kong dollar surges to strongest in two years

[SINGAPORE] The Hong Kong dollar advanced to its strongest since May 2017 as tight liquidity in the city keeps borrowing costs elevated.

The currency rose as much as 0.16 per cent to 7.7855 versus the greenback on Thursday, then pared the gain to 0.12 per cent as of 10.22am local time. The Hong Kong dollar jumped into the strong half of its trading band this week for the first time since September, as the one-month interbank rate climbed to the highest in more than a decade.

Higher borrowing costs are undermining a once-popular trade to sell the Hong Kong dollar and buy the greenback that had pushed the city's currency to the weak end of its trading band at 7.85. The city's monetary authority spent HK$22.1 billion (S$3.85 billion) in March to defend the currency's peg to the greenback.

Analysts have attributed the tighter liquidity to seasonal factors, as well as cash being tied up for dividend payments and large initial public offerings. The tighter liquidity has also coincided with demonstrations in Hong Kong.

"Hong Kong dollar movement comes with liquidity tightness," said Frances Cheung, head of Asia macro strategy at Westpac Banking Corp. The liquidity situation will persist until after the second large share offering, she added.

The Asia-Pacific arm of Anheuser-Busch InBev this week started preparing for a listing that could raise as much as US$9.8 billion, while Alibaba Group Holding Ltd is said to have filed for an IPO (initial public offering) that could raise US$20 billion.

BLOOMBERG