Hong Kong dollar pessimists stage a comeback

BEARISH bets on the Hong Kong dollar are gaining traction as a slump in local borrowing costs dulls the appeal of the currency versus the greenback. 

The Hong Kong dollar has fallen nearly 1 per cent from an 18-month high in December. That’s because the city’s one-month interbank borrowing rate slid, widening its gap with the US equivalent by the most since 2008. The large spread makes it lucrative for traders to borrow Hong Kong’s currency cheaply and sell it against the higher-yielding greenback.

Cheap funding costs were responsible for the Hong Kong dollar trading near the weak end of its 7.75-7.85 per dollar trading band for almost half of last year. However, that changed in November as the Hong Kong Monetary Authority’s months-long intervention, where it mopped up the local currency, pushed up borrowing costs high enough to discourage carry trades against the local dollar.

Since then, the benchmark one-month Hong Kong Interbank Offered Rate has renewed its decline as funding demand for year-end settlement eased and a spike fuelled by increased equity trading following China’s reopening abated, analysts said. The one-month Hibor is now about 160 basis points below the London Interbank Offered Rate of the same tenor, after being close to 90 basis points above that gauge in early December.

The drop in Hibor was from “a very high base, exacerbating the steepness of it,” said Kelvin Lau, senior economist at Standard Chartered Bank (HK) in Hong Kong. Back in December, the banking sector expected liquidity tightness crossing the new year and the Lunar New Year, which subsequently normalised. “The combination of a less hawkish Federal Reserve outlook and improved reopening prospects locally also probably fuelled expectations of renewed capital inflows,” Lau added. 

The Hong Kong dollar may stay near the weaker-half of its trading band, according to Oversea-Chinese Banking Corp. “USD/HKD is more likely to stay above 7.80 in the near term given the fairly negative Hibor-Libor spreads, although room for the spreads to turn yet more negative is limited,” said Frances Cheung, a Singapore-based rates strategist at the firm. BLOOMBERG

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