Hong Kong dollar spikes as short positions cut on expectations of higher rates
Demand for the currency also seen rising ahead of a public share offer by a health care unit of China’s Ping An Insurance
The Hong Kong dollar marked its biggest intraday gain in two months on Thursday as traders cut back short positions in the currency because of expectations that higher rates will close arbitrage windows and that demand for the currency will rise ahead of a big initial public share offering.
The currency rose 0.07 per cent to HK$7.8441 to the US dollar in mid morning trading, before retracing slightly to HK$7.8473. The rise was the biggest intraday gain since January 17.
Liquidity in the Hong Kong dollar has already tightened after the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, spent HK$51 billion (US$6.5 billion) to boost the currency after it fell to the lower end of its permitted trading band.
One-month Hibor – the Hong Kong interbank offered rate, a gauge of bank borrowing costs – climbed by 3.9 basis points on Thursday to 0.95 per cent, and is up 16 basis points since a week ago. The Hibor spread with its Libor counterpart has narrowed by 10 basis points, making carry trades – selling low-yielding assets to buy ones another with higher returns – less lucrative.
“The Hong Kong dollar rose sharply because traders are closing their short Hong Kong dollar positions because they can smell that interest rates are going to go up,” said Jasper Lo Cho-yan, senior vice-president at iBest Finance.
“It is not profitable to conduct an arbitrage trade at near the HK$7.85 level when you know the US-HK interest rate differential will narrow and boost the local currency.”
The Hong Kong dollar was pegged at HK$7.80 to the US dollar in October 1983, with a trading band of 7.75 to 7.85 introduced in 2005. Under this mechanism, the HKMA is obliged to intervene to prevent the currency from trading outside that range.