Traders Gear Up for Hong Kong to Defend Dollar Peg for 7th Day

(Bloomberg) -- Traders are preparing for Hong Kong’s de facto central bank to defend the local currency’s peg to the greenback for the seventh straight session, the longest run in five years.

The city’s dollar remains strong despite last week’s interventions, trading at 7.7504 versus the greenback Monday afternoon in Hong Kong. That’s just 4 pips away from the strongest it can technically trade. The Hong Kong Monetary Authority sold HK$1.43 billion ($185 million) of local dollars on Friday, taking the total since it began intervening in April to HK$49.45 billion.

The Hong Kong dollar has repeatedly breached the strong end of its trading band since April, boosted by a yield advantage over U.S. rates that makes it an attractive target for the so-called carry trade. Demand for Chinese company share sales and banks piling up cash for regulatory checks have mopped up liquidity in the financial system, also supporting the currency.

The city is witnessing more capital inflows than outflows, Financial Secretary Paul Chan said in an interview with Radio Television Hong Kong on Saturday. He added that Hong Kong has no plans to review the peg.

The gap between the Hong Kong dollar’s one-month Hibor, a measure of local borrowing costs, and the U.S. dollar rates narrowed to 40 basis points as of Friday. Carie Li, an economist at OCBC Wing Hang Bank Ltd., has said the spread needs to shrink to 20 basis points before the carry trade loses its appeal.

The aggregate balance, a gauge of interbank liquidity, will rise to HK$123.56 billion. That’s more than double its level in March, and the highest since May 2018.

©2020 Bloomberg L.P.