HKD posts largest growth in 15 years as liquidity tightens

The local currency climbed by as much as 0.63% to $7.793 against the USD.

Bloomberg reports that the weakening Hong Kong dollar suddenly booked its largest growth since September 2003 as the currency climbed by as much as 0.63% to $7.7930 against the greenback - marking a point beyond the middle of its trading band with the USD.

As money locked up for the Meituan IPO returned to the market and the $3b reserved for Haidilao will only be released later, the liquidity situation is likely to remain tight for some time, according to OCBC Treasury Research, which would allow the HKD to stay away from the weak end of the trading band.

Also read: Hong Kong's aggregate balance to hold above $50b by end-September

Interbank borrowing costs have been steadily narrowing the gap with US rates after three-month cost rose to 2.12518% on Friday, making it less attractive to short the local currency.

“The sudden surge in the Hong Kong dollar is very strange,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. “Traders may have come to believe that interest rates will keep rising, with some of them unwinding short-Hong Kong dollar carry trades, and that triggered stop losses and a stampede."

However, analysts believe that the gains are short-lived as the HKD is poised to crash back to $7.85 trading band in due course.

“[The] USD LIBOR is set to tick up following the highly possible rate hike by the Fed in September FOMC. In contrast, given the relatively sizeable aggregate balance (HK$76.3 billion), HIBOR may come off as the HKD liquidity may improve after the seasonality abates and the IPO money returns to the market. Should US-HK yield differential widen again, it is still possible for the return of carry trade to push down HKD,” added OCBC. 

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