- Currency sank to lowest level since August 2007 on Wednesday
- HKMA says it has no intention of abandoning peg to the dollar
Hong Kong’s dollar jumped the most in 12 years as the prospect of more stimulus from Japan and Europe ignited a global stocks rebound and curbed bets the city’s currency peg will end.
The local dollar rose as much as 0.4 percent -- the biggest intra-day gain since September 2003 -- before trading up 0.3 percent at HK$7.7950 against its U.S. counterpart as of 2:50 p.m. local time, data compiled by Bloomberg show. The currency, which sank to an eight-year of HK$7.8295 on Wednesday, erased the week’s loss and returned to the strong side of its HK$7.75-HK$7.85 trading range.
Asian stocks rebounded on Friday after European Central Bank chief Mario Draghi indicated he may bolster economic support as soon as March and a newspaper reported that the Bank of Japan is considering further easing measures. The Hang Seng Index of shares dropped earlier this week to levels last seen in 2012, while bonds tumbled and money-market rates surged as speculation mounted that the Hong Kong dollar’s link to the greenback will be scrapped.
"There’s calmer sentiment in the market after comments from policy makers in Europe and Japan,” said Andy Ji, a Singapore-based foreign-exchange strategist at Commonwealth Bank of Australia. “It’s a bit of a stalemate right now, with people taking a breather."
The Hong Kong Monetary Authority reiterated on Wednesday it has no intention of ending the currency peg and Chief Executive Norman Chan said two days earlier that he expects the exchange rate to drop to the lower limit of the band. Options prices indicate a 35 percent chance that the Hong Kong dollar will weaken beyond its current trading range this year, according to data compiled by Bloomberg. That’s down from 49 percent on Wednesday and compares with 9.5 percent at the end of December.
Goldman Sachs Group Inc. said on Monday the weak end of the currency band is likely to be reached and there is scope for some HK$300 billion ($38.4 billion) of outflows before a significant increase in borrowing costs. The HKMA’s aggregate balance, the level of interbank liquidity that rises or falls when the authority intervenes in the currency market, was HK$377.4 billion as of Monday. It more than doubled in the last two years as a resurgent U.S. dollar fueled demand for the city’s pegged currency and money poured into Hong Kong property.
“Weakening Hong Kong fundamentals and capital inflows suggest that the Hong Kong dollar will trigger the weak side of the convertibility band, but we are confident in the HKMA’s stated commitment to maintain” the pegged exchange-rate system, Sue Trinh, the Hong Kong-based head of Asia foreign-exchange strategy at Royal Bank of Canada, wrote in a research note.
Hong Kong dollar borrowing costs for three-month loans rose seven basis points to 0.69 percent on Friday, the highest since May 2009. The Hong Kong Interbank Offered Rate had surged the most in seven years on Wednesday, climbing above U.S. dollar rates for the first time in two months as capital outflows from the city accelerate. The rate had been at around 0.4 percent for the past four years and had risen to a record 16.57 percent in 1998, when speculative bets against the peg surged during the Asian financial crisis.
The Hong Kong dollar has been pegged in a range against the greenback since 2005. It was linked to its U.S. counterpart in 1983, when negotiations between the U.K. and Beijing over the city’s return to Chinese rule spurred an exodus of capital.