Hong Kong’s intervention to support the local dollar has made just a minor dent in traders’ bearish bets, suggesting more liquidity will need to be drained from the system to defend the currency peg.
(Bloomberg) — Hong Kong’s intervention to support the local dollar has made just a minor dent in traders’ bearish bets, suggesting more liquidity will need to be drained from the system to defend the currency peg.
The Hong Kong dollar has strengthened less than 0.1% from the weak end of its trading band with the greenback since the city’s de-facto central bank stepped in this week. Traders are looking through the intervention to the recent slump in the city’s interbank rates, which continue to offer hedge funds the biggest opportunity in history to borrow the currency cheaply and buy the higher-yielding US dollar in the so-called short HKD carry trade.
The one-month interbank offered rate for the city’s dollars, or Hibor, rose slightly on Wednesday after falling for six straight days, and it’s near the deepest discount on record to its US equivalent. The Hong Kong dollar was little changed at 7.8483 per greenback as of 1:17 p.m. local time. The currency is allowed to trade in a band of 7.75 to 7.85.
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“We are of the view that FX intervention has yet to fully run its course, as US-HK rate spreads remain very wide,” said Cindy Keung, an economist at OCBC Wing Hang Bank in Hong Kong. Intervention will “persist for a while before inflows into Hong Kong dollar assets and loan demand returns under the China reopening trade.”
Soft demand for Hong Kong dollar assets with IPO activity, loan growth and a recovery in tourism yet to gather momentum are behind the low funding costs in the city, according to Keung.
Analysts from Mizuho Bank Ltd and Bloomberg Intelligence also see more interventions from the HKMA. They expect the aggregate balance — a gauge of interbank liquidity — to fall toward HK$54 billion ($6.9 billion), the low seen after the Federal Reserve’s last rate hike cycle.
The balance will fall to HK$77 billion on Thursday after the latest intervention, showing the HKMA has drained more than 75% of interbank liquidity over the last year. The authority said it bought more than HK$19 billion this week.
In 2022, the monetary authority also intervened to defend the Hong Kong dollar from falling beyond the weak end of the peg. That eventually pushed Hibor high enough to dampen the carry trade.
The weakening of Hong Kong’s currency also reopens the debate over its future. Bill Ackman said in late November he’s betting big on a collapse of the Hong Kong dollar, a trade supported by hedge fund manager Boaz Weinstein, founder of Saba Capital Management.
The HKMA has repeatedly said that the linked exchange rate system — a currency peg that has endured mostly unscathed for almost 40 years — will remain unchanged.
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Analysts expect local rates will pick up with the HKMA resuming its intervention, but that could also add headwinds to the city’s struggling economy.
“Higher rates will be marginally negative for property and stock markets, as well as hurting loan demand,” said Stephen Chiu, chief Asia FX & rates strategist at Bloomberg Intelligence in Hong Kong.
(Adds third paragraph with latest reading of Hibor and Hong Kong dollar.)
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