THE supply of Hong Kong dollars tightened due to a rally in local shares and seasonal factors, nudging the currency towards the strongest level it’s allowed to trade versus the greenback.
Measures of Hong Kong dollar’s funding costs jumped in both foreign-exchange and money markets, as traders borrowed cash to pile into surging equities and banks hoarded liquidity before quarter-end regulatory checks. That prompted the city’s currency, which is only allowed to fluctuate in a band of 7.75 to 7.85 per US dollar to inch closer to the stronger end of that range.
Hong Kong stocks are being swept higher as mainland’s mom-and-pop investors to global hedge funds buy “everything” related to China following stimulus measures from the nation’s authorities to boost the world’s second-largest economy.
“Hong Kong equities drew idle capital parking in the banking system and some investors may have added leverage to buy stocks,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank. “The risk of Hong Kong dollar hitting 7.75 has been increasing alongside the stellar equities performance.”
Funding costs have also risen because of seasonal effects and the recent bond issuance, according to Carie Li, global market strategist at DBS Bank. The fact that Hong Kong’s liquidity pool is already close to the lowest since 2008 also helped exacerbate the tightness, she added.
Hong Kong dollar’s one-month Hibor, an indicator of money-market rates, climbed to the highest since early August on Wednesday (Oct 2). The currency’s forward points of the same tenor, measuring its costs versus the greenback in the foreign-exchange derivatives market, hovered near the highest since December 2023.
Trading volume of the Hong Kong dollar options was US$1.9 billion as of Wednesday afternoon, a tad below that on the yuan and the yen, according to data from the Depository Trust & Clearing Corp, signalling strong investor interest in trading the currency.
The Hong Kong dollar edged up 0.1 per cent to 7.7655 per greenback on Wednesday while the Hang Seng China Enterprises Index climbed as much as 8.5 per cent, extending its winning streak to 13 straight days.
“The key to watch though is the sustainability of this strong equity market performance linked to China stimulus,” said Eddie Cheung, senior EM strategist at Credit Agricole CIB. “For the moment, sentiment is in the driving seat.” BLOOMBERG
