Resilient Hong Kong Dollar Shrugs Off Death of Carry Trade

(Bloomberg) -- The once red-hot long Hong Kong dollar trade is fading, but so much Chinese cash is flowing into the city that its currency is once again near the strongest it can be.

The city’s dollar has been bolstered by capital inflows from China and demand for mega-listings in the city’s stock market. Local banks have stepped up hoarding cash for regulatory checks toward the end of the month.

On Friday, the currency was little changed at 7.75 per greenback, the strongest it can trade. It has been hovering around that level since April, when it triggered the first round of intervention from the de facto central bank in more than a year.

The Hong Kong Monetary Authority sold HK$1.16 billion ($150 million) of local dollars Friday, taking intervention since April past $14 billion. As a result, the aggregate balance -- a measure of interbank liquidity -- will rise to HK$186 billion next week, the highest since 2017.

This has helped create a shift in the underlying factors driving the currency, which until recently was mostly moved by a strategy where hedge funds bought the higher-yielding local dollar against the greenback.

That trade has lost its appeal. The city’s interest-rate premium over the U.S. is evaporating, with the gap between Hong Kong borrowing costs and those in the U.S. having shrunk by more than 90% over the past three months. It is now close to turning negative for the first time since November.

Intervention by the HKMA will further reduce the gap between the Hong Kong dollar’s one-month interest rate and borrowing costs on the greenback. On Wednesday, this stood at 9 basis points, the lowest since February.

Inflows have helped the Hong Kong dollar stay resilient while the recession-hit local economy has suffered repeated setbacks. So far, there is little evidence of massive capital outflows or big bets on sustained weakness, with the currency shrugging off concerns about the city’s future as a financial hub amid escalating tensions between China and the U.S.

“A busy pipeline for stock listings and equity inflows driven by a global risk-on move will support the Hong Kong dollar,” said Carie Li, an economist at OCBC Wing Hang Bank. She expects it to continue testing the band’s strong end.

©2020 Bloomberg L.P.