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Hong Kong’s dollar is having its best bull run since Sars, and shows no sign of slowing down amid interest rate gap with US

  • The Hong Kong dollar, pegged to the US dollar since 1983, is set for its best run since 2003 within a trading band
  • The strength is likely to be sustained as local borrowing costs are expected to stay higher than US rates in the near term

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A bank staff counting HK$1,000 banknotes at the Hang Seng Bank in Hong Kong on Tuesday, April 16, 2019. Photo: Bloomberg
Bloomberg

In a world convulsed by market volatility, there’s one surety (for now): Hong Kong’s currency will continue outperforming the greenback.

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Elevated local rates relative to the US have made the city’s currency the best carry trade in Asia, and propelled it to a 0.51 per cent gain this month – set for its best in more than 16 years. The strength is likely to be sustained as local borrowing costs are expected to stay higher than US rates in the near term, while Hong Kong’s interbank liquidity pool remains small.

Even as Hong Kong cut its base interest rate twice in March, liquidity remains so tight in the city that the local dollar is edging closer to the strong end of its trading band at 7.75. Demand for the currency has been increased by local banks hoarding cash before quarter-end regulatory checks, and more than 20 days of net local stock purchases by Chinese mainland investors. In addition, a global shortage of US dollars could boost the Hong Kong dollar as a proxy.

“The Hong Kong dollar may hit 7.75 in the short term,” said Carie Li, an economist at OCBC Wing Hang Bank. “Hong Kong rates won’t follow the US borrowing costs to decline quickly even after the quarter-end because the local liquidity pool is small, and that will help maintain a wide yield differential.”

The rally follows an expansion of the gap between the Hong Kong dollar’s borrowing costs and the corresponding US rates to the widest since 1999, a move that makes being long the city’s currency a lucrative strategy. The aggregate balance in the city – an indicator of interbank cash supply – has shrunk 70 per cent over the past two years to HK$54 billion.
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