Hong Kong dollar trapped in weaker cycle, with the doldrums to last for months, traders say

The Hong Kong dollar is expected to trade close to the 7.85 weak-side convertibility undertaking through 2019 because of rising volatility in the currency amid a string of initial public offerings and strength in the US dollar, analysts said.

The Hong Kong dollar traded at 7.8487 per US dollar late afternoon on Monday after previously falling to a low of 7.8499, approaching the threshold for the monetary authority to intervene in the currency markets.

Under its currency board system, the de facto central bank is obliged to buy or sell the Hong Kong dollar to keep it within a range between 7.75 to 7.85 per dollar.

“The Hong Kong dollar foreign exchange points may be more influenced by short term events than before, such as IPOs,” Ronald Man, fixed income and currency emerging Asia strategist at Bank of America Merrill Lynch said in a recent research note.

Hong Kong’s first listed company with a dual-class share structure Xiaomi locked up about HK$23 billion (US$2.9 billion) in subscriptions in June. China Tower, the world’s largest operator of transmission towers for mobile phone networks, is also planning to raise as much as HK$68.1 billion in an IPO, the biggest such sale globally in nearly four years. Retail investors can subscribe to the offer from Wednesday until next Tuesday.

But any banking liquidity squeeze is likely to ease once the IPOs are completed. That would widen back the US-Hong Kong interest rate gap, attracting currency traders to sell the Hong Kong dollar for the higher yielding US dollar and exerting pressure on the local currency, analysts said.

One-month Hibor was at 1.8 per cent on Monday, down 33 basis points from a 10-year high of 2.13 per cent hit on June 25, when it briefly closed its gap with its US Libor counterpart for the first time since 2017. On Wednesday, the gap widened back to 21 basis points.

While interest rates on various fixed deposits have risen in the past months, the city’s commercial banks in Hong Kong have yet to raise their prime lending rates. The Hibor rate is likely to stay below Libor as liquidity in the city is likely to stay relatively supported, analysts said.

The Hong Kong Monetary Authority has been raising benchmark rates in lockstep with the US Federal Reserve since the current tightening cycle got underway in December 2016.

In interventions in April and May, the monetary authority spent around HK$70 billion to support the Hong Kong dollar, which has tightened the amount of dollars in circulation.

However, inflows into Hong Kong dollar assets and commercial banks that continue to refrain from raising the prime lending rates have partially offset the liquidity drain, analysts said.

Around the region, markets are poised for more weakness in Asian currencies, including the yuan and the Hong Kong dollar, said Heng Koon How, head of markets strategy at United Overseas Bank.

Strong US growth and rising inflation indicators reinforce the Federal Reserve’s gradual rate hiking path, boosting the US dollar and Treasury rates, Heng said.

DBS Bank forecasts three-month Hibor to rise to 3.25 per cent by the end of 2019, up from Wednesday’s 2.07 per cent level while three-month Libor was expected to hit 3.75 per cent.