HK dollar jumps as borrowing costs riseBusiness | Bloomberg and Avery Chen 13 Dec 2019
The Hong Kong's dollar climbed into the strong half of its trading band against the greenback for the first time since July, boosted by elevated borrowing costs in the city.
The currency climbed as much as 0.13 percent to 7.7982 per dollar yesterday, crossing the 7.8 threshold. Local interbank rates have stayed high since November, outstripping the income a trader can expect on US dollars. That's undermined the so-called carry trade, where traders sell Hong Kong dollars and buy greenbacks, which had been profitable for years.
The Hong Kong dollar's strength also coincides with year-end regulatory checks on banks that typically sees higher demand for cash. That may lock up funds, tighten liquidity and stoke local rates into the final days of 2019. The Federal Reserve on Wednesday left interest rates unchanged and signaled it would stay on hold through 2020, limiting the room for Hong Kong rates to fall even after the seasonal factors are out of the way.
The Hong Kong Monetary Authority said yesterday that foreign-exchange and money markets continue to operate smoothly and that the exchange rate remains stable.
One-month interbank funding costs for the currency have been higher than comparable rates on the greenback for 24 straight sessions as of Tuesday - the longest stretch in four years.
The Hong Kong dollar will likely return to the weak half of the band as year-end effects fade, said Eddie Cheung, an emerging markets strategist at Credit Agricole CIB.
"That's because we currently don't have major drivers for strong inflow, the city's economy will face significant pressures in the first half and the medium to long-term prospects on the trade war aren't great," he said.
The Hong Kong dollar pared its gain to trade at 7.8060 as of last night. A gauge measuring the demand for bearish options on the currency over bullish wagers tumbled the most since early 2015.
Meanwhile, the Hongkong and Shanghai Banking Corporation has maintained its best lending rate at 5 percent. Local banks have little scope for cutting prime rates in 2020 given the slowdown in the pace of reducing interest rates in the US, low operating profits from mortgage businesses and high capital costs, said senior vice president of mReferral Mortgage Brokerage Services Cho Tak-ming.