HKD jumps into strong half of band, hurting shorts

Hong Kong’s dollar punched into the strong half of its trading band for the first time since September, riding on momentum provided by elevated borrowing costs in the city.

The currency climbed as much as 0.19% to 7.7987 a dollar on Tuesday, crossing the 7.8 threshold. Local interbank rates remain near a decade high, outstripping the income a trader can expect on U.S. dollars. That’s undermining a carry trade – sell Hong Kong dollars, buy greenbacks – that had been profitable for years.

The tight liquidity is coinciding with dramatic street protests, just like last month, when the surge in borrowing costs suddenly accelerated. But market watchers see other reasons for the trend: companies are hoarding cash to pay quarterly dividends and at least two large share sales may lock up funds.

“These tightening events will keep market players cautious and prompt them to continue hoarding cash,” said Carie Li, an economist at OCBC Wing Hang Bank Ltd.

Rates are likely to remain elevated in July, Li said. By contrast, U.S. interest rates are dropping as the Federal Reserve prepares to ease monetary policy.

The Hong Kong dollar carry trade was a steady winner for years as investors borrowed the currency cheaply to invest in higher-yielding American assets. It became less of a sure thing after the Hong Kong Monetary Authority started buying the local dollar to defend the peg from April 2018.

The HKMA said in June that a higher Hibor and a stronger local dollar are “consistent” with the currency peg system, though uncertainty over the Fed’s policy was increasing. MDT/Bloomberg