Hong Kong dollar strengthens to three-year high as rising Hibor on tight liquidity adds fuel to Asia’s best currency carry trade

Elevated local rates are increasing the appeal of owning the city’s currency, after years of depreciation wagers. Selling the greenback and using the proceeds to buy Hong Kong dollars has delivered Asia’s highest Sharpe ratio – a measure of returns adjusted for price swings – over the past month.

The sustained strength has much to do with expectations that liquidity conditions will remain tight, keeping funding costs for the local dollar high versus those on the greenback. Traders unwinding their short positions in December triggered the biggest monthly rally since 2008, and the longest in three years.

“For the time being, the yield differential is still in favour of the Hong Kong dollar and it’ll probably stay on the strong side of the midpoint for a while,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group. Short-term rates are likely to remain elevated heading into the Lunar New Year holiday before falling in February, he said.

The options market is now pricing in a roughly 50-50 chance that the currency – which is pegged to the US dollar – will touch the strong end of its narrow trading band by the end of March. That compares with just 9.5 per cent about a month ago. The Hong Kong dollar hasn’t been quoted at the 7.75 per greenback level since early 2016. It slipped 0.03 per cent to 7.7719 as of 11:52am local time.