Hong Kong dollar surges to strongest since 2017 as shorts unwind

Hong Kong

THE Hong Kong dollar advanced to its strongest level since April 2017, as traders unwound short positions on expectations that borrowing costs will rise amid seasonal demand for cash and potential new stock listings. The currency, which is pegged to the greenback, rallied as much as 0.16 per cent to 7.7770 per US dollar on Friday. It has been driven by bets that funding costs will increase, given seasonal cash demand ahead of the Chinese New Year holiday later this month. Continued mainland capital inflows into Hong Kong stocks and the local exchange's discussion of potential secondary listings by Chinese technology firms have also offered support.

Along with the potential for large stock listings and heightened cash demand, the gains were also supported by investors seeking haven assets amid rising Middle East tensions, said Alan Yip, a senior foreign-exchange strategist at Bank of East Asia Ltd, who sees the currency strengthening to 7.76 per greenback in the next few weeks.

Capital inflows into Hong Kong stocks also helped send the currency higher, according to Gao Qi, a strategist at Scotiabank in Singapore. Mainland investors bought shares listed in the city for a 35th consecutive day on Friday through the stock connect, the longest buying streak since September.

Friday's advance follows the Hong Kong dollar's largest monthly rally since 2008 in December, which was fuelled by a seasonal spike in interbank interest rates.

The recent strength is a far cry from the most of the past two years, when the Hong Kong dollar repeatedly touched the weak end of its trading band as investors sold the currency to buy the higher-yielding greenback.

The Hong Kong dollar was 0.13 per cent stronger at 7.7800 as at 4.11pm local time. The currency's one-month interbank rate fell 13 basis points to 2.14 per cent. BLOOMBERG