Hong Kong dollar slips as loose liquidity revs up carry trades

[HONG KONG] The Hong Kong dollar drifted down to near the weakest level since August as excess cash in the banking system spurred carry trade bets against the pegged currency.

The strategy of borrowing Hong Kong dollars cheaply to invest in the higher-yielding greenback is gaining traction as financing costs in the city slump. The one-month rate in the interbank market has dropped to the lowest since November and is set to fall for the fifth straight month.

Investors are using these cheap funds to bet against the Hong Kong dollar by exploiting the widest interest-rate gap with the US since November. Demand for Hong Kong’s currency has also faded as cooling stock markets slow southbound investment from mainland Chinese buyers.

“The southbound inflows have not been as strong as last year, and there isn’t much seasonality boosting demand, so banks are willing to offer more liquidity,” said Carie Li, a strategist at DBS Bank. “Therefore, there’s more incentive to buy the US dollar and sell the Hong Kong dollar in a carry trade.”

Hong Kong’s currency has been calm in recent months after swinging between the weak and strong ends of its trading band last year due to the US dollar’s volatility and shifting funding costs. The Hong Kong Monetary Authority had stepped in multiple times to keep the currency boxed in within a trading band of 7.75 to 7.85 per US dollar.

This period of calm is shifting as the currency crosses the mid-point of its trading band towards the weaker end. It was little changed at around 7.81 per greenback on Thursday morning in Hong Kong.

SEE ALSO

Hong Kong’s key rate climbs above 3% to pose risks for economy

Hong Kong resumes currency intervention spree amid low rates

DECODING ASIA

Navigate Asia in
a new global order

Get the insights delivered to your inbox.

This shift has intensified market focus on the widening interest-rate differential between the US and Hong Kong. Investors are particularly wary as US President Donald Trump’s fiscal policies continue to keep US funding costs elevated.

“Lately, the wider Hong Kong dollar and US dollar rate differentials have prompted the return of carry trade,” said Cindy Keung, an economist at OCBC Bank (Hong Kong). She does not rule out further weakening for the currency, but expects some resistance at the 7.82 level. BLOOMBERG