Midnight buyers push Hong Kong dollar up for first time in a week, but outlook remains uncertain

Offshore yuan falls for third day in a row

PUBLISHED : Thursday, 21 January, 2016, 11:01am
UPDATED : Thursday, 21 January, 2016, 11:41am

Big buying orders for Hong Kong dollars overnight saw the local currency bounce back on Thursday morning, ending a five-day falling streak.

The Hong Kong dollar was trading at 7.8099 at 10am after hitting 7.8294 at midnight, the lowest level in eight and a half years. The currency had fallen 0.88 per cent over the previous five days due to capital outflow and worries over the mainland China and local economy.

Jasper Lo Cho-yan, director of Tung Shing Futures, said there were big buying orders for Hong Kong dollars at 2am, when it was close to the 7.83 level.

“The big buying orders may well be allies of the Hong Kong Monetary Authority to prevent the local currency from falling below 7.83 which is an important supporting level,” Lo said. “This has stabilised the local currency, allowing to bounce back for the first time in a week, by more than 200 basis points.”

The long-term view of the currency also improved on Thursday morning but remains bearish, with 12-month forward contracts trading at 7.88 at 10am, improved from 7.89 on Wednesday, which was the weakest since 1999.

The weak Hong Kong dollar has attracted some speculators to try to bet on attacking the peg
Jasper Lo, Tung Shing Futures

Lo said the forward market showed there were still traders who believed the peg could not be kept and the forwards were thus trading beyond the weak end of the peg at 7.85.

Under the peg, the HKMA will use its HK$3.3 trillion Exchange Fund to intervene whenever the currency edges close to 7.75 or 7.85.

“The weak Hong Kong dollar has attracted some speculators to try to bet on attacking the peg,” Lo said. “They may not win but they are trying to push the currency to the weak end and force the HKMA to intervene which may drive the interest rate up and hurt the stock markets. They are using similar strategies as were seen in the 1998 Asian financial crisis. The market will continue to be volatile.”

Bank of America Merrill Lynch said in a research report that selling pressure against the Hong Kong dollar had been intensifying with FX options reporting a cumulative notional volume of US$15 billion over three months.

“We revise our USD/HKD forecast to 7.85 for 2016 as a whole and revise our three-month Hibor forecast up,” the report said.

Three-month Hibor rose to a fresh five-year high at 0.62679 per cent on Thursday, after hitting 0.55 per cent on Wednesday. Six-month Hibor rose to 0.88 per cent on Thursday and 12-month rose to 1.26 per cent.

Offshore yuan continued to fall on Thursday morning to trade at 6.6033 at 10 am, following falls of 0.15 per cent on Wednesday and 0.13 per cent on Tuesday. The currency gained 0.5 per cent on Monday and was up 1 per cent last week after People’s Bank of China intervention.

Onshore yuan was unchanged, trading at 6.5778.

The spread between the onshore and offshore yuan has narrowed down to 255 basis points, down from a record 1,400 basis points on January 7.

The People’s Bank of China set the yuan mid-price against the US dollar at 6.5585 on Thursday morning, 7 basis points weaker than on Wednesday, when it set the mid-price 18 basis points stronger.

It set the mid-price against the euro stronger by 241 basis points to 7.1386, and for every 100 yen weaker by 203 basis points at 5.6037. The mid-price against the pound was set 260 basis points weaker at 9.3247.

Traders are allowed to trade up to 2 per cent either side of the mid-price for the day.