Hong Kong Dollar Jumps Most Since 2003 as Liquidity Tightens

(Bloomberg) -- The Hong Kong dollar surged the most in 15 years, with analysts citing the prospect of higher rates in the city, stop losses and upcoming holidays as possible triggers.

The currency climbed as much as 0.63 percent to 7.7930 per greenback, its biggest gain since 2003 and beyond the mid-point of its trading band with the greenback.

Hong Kong Dollar Jumps Most Since 2003 as Liquidity Tightens

Interbank borrowing costs in the city have been narrowing the gap with U.S. rates, with the Hong Kong three-month cost climbing to 2.12518 percent on Friday, the highest level in a decade. That’s made shorting the local currency a less appealing trade. The spread had helped weaken the Hong Kong dollar for much of this year, prompting the de-facto central bank to repeatedly intervene to keep the currency within its trading band.

Banks have been raising their Hong Kong dollar time deposit rates, with HSBC Holdings Plc lifting the rate for three to 12-month periods by 10 basis points on Wednesday, according to the Hong Kong Economic Times. Lenders haven’t raised the prime rate, which affects the costs of mortgages, since 2006 but the chance of a hike is increasing, especially with the Federal Reserve expected to lift rates next week.

“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."

China and Hong Kong have holidays next week, while mainland markets will be closed for the first week of October. Adding to the complex picture for the Hong Kong dollar, the local government is launching a new citywide payment system that will make it quicker and easier to transfer funds.

"In the longer term, the gains are not sustainable," said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. "The Hong Kong dollar will be back to HK$7.85 in due course. Fundamentally, it is appropriate for the currency to trade at the weak end of the convertibility band. Hong Kong is fully exposed to slowing Chinese growth."

The Hong Kong dollar was up 0.49 percent to HK$7.8040 as of 2:28 p.m. local time.

Thanks to the currency peg, Hong Kong has little choice but to import U.S. monetary policy. Years of ultra low borrowing costs in the wake of the global financial crisis has helped fueled a housing bubble in the city. Citigroup Inc. and CLSA Ltd. are among those forecasting declines in home prices as mortgage costs rise.

“The banks’ increase of Hong Kong dollar time deposit rates has raised speculation that the prime rate will be boosted after a possible Fed hike this month," said Gao Qi, a currency strategist at Scotiabank in Singapore. "Traders may have unwound short positions, triggering more to follow and resulting in a quick advance in the currency."

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