Bears Have Hong Kong Dollar in Their Sights as Drops Quicken

  • Pegged currency is falling at fastest pace in 14 months
  • Gap between U.S., local funding costs is widest since 2008

Hong Kong Dollar Falls at Fastest Pace in 14 Months

For a pegged currency, Hong Kong’s dollar is once again posting some outsized moves.

The city’s dollar -- linked to the greenback since 1983 -- is falling at the fastest pace in 14 months as a widening interest-rate gap with the U.S. reduces the lure of the city’s assets. Local banks, awash with capital and competing for red-hot mortgage demand, are in no rush to follow the Federal Reserve and charge more for loans. That means further weakness ahead for the local currency, according to Mizuho Bank Ltd. and Standard Chartered Plc.

"We are bearish on the Hong Kong dollar," said Ken Cheung, a foreign-exchange strategist at Mizuho Bank. "The interest-rate differential between the currency and the greenback will persist and investors will want to chase the higher-yielding greenback."

While the city’s dollar is still far from the lower end of its trading band of 7.85 against the greenback, its decline is drawing attention in a world where currency pegs are becoming rarer. The Hong Kong dollar has fallen 0.3 percent this year and touched 7.7849 on Tuesday, its weakest level since February 2016 -- when the last selloff was subsiding amid jitters about both China’s economy and the end of an era of ultra-low borrowing costs.

"The Hong Kong dollar typically doesn’t move much, but everyone pays attention when it does,” said Eddie Cheung, a Hong Kong-based foreign-exchange strategist at Standard Chartered.

The premium of the one-month U.S. interbank rate, known as Libor, over Hong Kong’s Hibor widened to 60 basis points on Tuesday, the most since December 2008. The Hong Kong dollar’s funding cost has declined 36 basis points this year as the greenback’s climbed 22 basis points.

Investors are borrowing the currency in the money market and dumping it in the spot and forwards foreign-exchange market for the greenback, in order to take advantage of the swelling rate gap, according to Mizuho Bank’s Cheung.

Standard Chartered’s Cheung said the currency will continue to decline to test 7.82 because possible future rate hikes in the U.S. will support Libor, while liquidity in Hong Kong is likely to stay ample. Mizuho’s Cheung says he sees the local dollar weakening to as low as 7.79.

The Hong Kong dollar was linked to the greenback more than three decades ago when negotiations between the U.K. and Beijing over the city’s return to Chinese rule spurred an exodus of capital, and policy makers in 2005 committed to limiting moves to the current range of 7.75 to 7.85. The currency was trading down 0.03 percent at 7.7820 Wednesday evening.

It’s expected that the Hong Kong dollar will weaken under the linked exchange rate system when the U.S. dollar interest rate rises above the local rate, a Hong Kong Monetary Authority spokesperson wrote in an email. The HKMA will ensure the stability of the exchange rate in accordance with the currency board system, the person said.

The gap between the Hong Kong and U.S. dollar rates has gone a bit too far, Societe Generale SA strategists Frances Cheung and Amit Agrawal wrote in a note on Wednesday. There are no signs of capital outflows, they added.

— With assistance by Tian Chen, Emma Dai, and Fion Li

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