H.K. Dollar Falls to Weak Half of Band for First Time Since ‘19

(Bloomberg) -- The Hong Kong dollar fell into the weak half of its trading band for the first time since December 2019 as the emergence of a new coronavirus variant hurt the appetite for risk assets.

The exchange rate declined to as low as 7.8020 per greenback, passing the the midpoint of its 7.75 to 7.85 allowed trading range against the U.S. currency. The Hong Kong dollar has fallen 0.3% in November to head for its biggest monthly loss since February 2020.

Selling pressure on Hong Kong’s currency intensified this month as the greenback rallied on bets that the Federal Reserve will tighten policy sooner due to robust U.S. growth data. The emergence of a new Covid variant, known as omicron, further weighed on the Hong Kong dollar as it spurred doubts on the global economic recovery. The city reported three cases with the new strain.

“The uncertainty surrounding omicron is not helping” with sentiment, said Irene Cheung, an foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “At this point, we do not expect the Hong Kong dollar to trade swiftly to 7.85. It will likely be a gradual move, unless the greenback gains much more strength.”

The decline in the Hong Kong dollar comes alongside losses in other non-haven assets. The Australian and New Zealand dollars also fell on Tuesday among the Group-of-10 currencies, while the Thai baht led the drop in emerging Asia. The selloff intensified after Moderna Inc.’s CEO said existing vaccines may struggle to cope with the new Covid-19 mutation. The Bloomberg Dollar Spot Index has risen 2.1% in November, set for its best monthly advance since June. 

The drop beyond 7.8 puts the Hong Kong dollar closer to the weak end of its trading band, a breach of which will prompt the local monetary authority to intervene. However, the increase in debt issuance by the city’s de facto central bank over the remaining year could drain interbank liquidity and thus make it less lucrative for traders to short the Hong Kong dollars. 

The last episode of frequent intervention by the Hong Kong Monetary Authority at the weak end of the trading band took place in 2019. That was when traders ramped up borrowing of the city’s currency cheaply and sold it against the higher-yielding greenback to profit from the interest-rate difference. Now, the so-called carry trade is no longer lucrative as the rate gap between the two currencies has narrowed. 

The Hong Kong dollar was little changed at 7.7997 as of 4:21 p.m. local time.

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With assistance from Bloomberg