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Hong Kong Dollar Is Surprise Winner as Protesters Blockade Roads

Hong Kong Dollar Is Surprise Winner as Protesters Blockade Roads

(Bloomberg) -- Hong Kong’s currency is strengthening as protesters take over the city’s main roads in an attempt to stop a planned extradition treaty with China.

The Hong Kong dollar rallied as much as 0.12% to HK$7.8270 per greenback, its strongest since late December. Liquidity has been tightening in the city in recent days, with the one-month interbank borrowing cost jumping to the highest level in more than a decade Wednesday. Bears are also being squeezed by a surge in the cost of shorting the currency, as the local dollar’s 12-month forward points rise to the highest since January 2017.

Demand for cash usually increases in June, as banks hoard money for regulatory checks and corporate clients pay dividends. Chinese e-commerce giant Alibaba Group Holding Ltd.’s planned initial public offering in the city has also raised expectations for tighter liquidity. Citigroup Inc. said in a note last month that these factors could contribute to “substantial liquidity tightness” in the Hong Kong dollar.

Hong Kong Dollar Is Surprise Winner as Protesters Blockade Roads

“The funding squeeze leads to some unwinding of short Hong Kong dollar positions or an increase in long positions,” said Carie Li, an economist at OCBC Wing Hang Bank Ltd. “It may hover around 7.83 for a while because people are still cautious about upcoming factors which might absorb liquidity, but they also believe that liquidity might loosen again.”

Thousands of protesters converged on Hong Kong’s legislature Wednesday, when lawmakers were scheduled to debate legislation that, if passed, would for the first time allow extraditions to China. While the city’s Chief Executive Carrie Lam argues the bill is necessary to close a legal loophole, opponents say its approval would blow up a barrier intended to keep the former British colony’s judicial system separate from China’s.

Hong Kong Dollar Is Surprise Winner as Protesters Blockade Roads

Shorting the Hong Kong dollar has been a popular trade since 2017, as investors borrowed the currency cheaply and sold it against the higher-yielding greenback. That sent the local dollar to the weak end of its trading band many times and prompted the city’s de facto central bank to intervene. The local authority has spent $2.8 billion since the start of March to defend its foreign-exchange peg with the greenback.

The Hong Kong dollar’s one-month interbank interest rate, known as Hibor, climbed 29 basis points to 2.42%, the highest level since October 2008. The jumping Hibor has helped narrow a discount to the borrowing costs on the greenback to the smallest since April.

To contact the reporters on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Livia Yap in Singapore at lyap14@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, David Watkins, Philip Glamann

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