The resurgent Hong Kong dollar has pushed closer to the strong half of its trading band, amid a spike in local funding costs that has upende...

Hong Kong Dollar Rises Toward Strong Half of Band as Short Sellers Bail

The resurgent Hong Kong dollar has pushed closer to the strong half of its trading band, amid a spike in local funding costs that has upended crowded bets on shorting the currency.

The Hong Kong dollar saw its biggest intraday rise in three years on Monday to as high as 7.8004 per dollar, bringing its gain for November to 0.6%. That puts it on track for the best month in two decades and is the closest the currency has been to the mid-point of its 7.75 to 7.85 trading band since February.

The rally came as the Hong Kong Monetary Authority’s intervention in the foreign-exchange market, which effectively lifted interbank funding costs, rendered a popular strategy of shorting the local dollar unprofitable. The city’s three-month funding costs rose to levels higher than the US equivalent for the first time since February last month.

“I expect the Hong Kong dollar to be settling at around a 7.80 handle before the next Federal Reserve meeting in December,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank Ltd. in Hong Kong. “Meanwhile, the Hong Kong dollar liquidity withdrawal due to FX intervention will pause for a while.”

Hong Kong Dollar Rides Pivot Wave to February High

The Hong Kong dollar had been trading near the weak end of its band for almost half of this year, as investors borrowed the currency cheaply and sold it against the higher-yielding greenback. Now, the tables have turned, with local authorities’ intervention shrinking the interbank liquidity pool by about 70% in the past six months.

“Shorter-end Hong Kong dollar rates started to pick up more rapidly against US counterparts,” said Stephen Chiu, chief Asia FX & rates strategist at Bloomberg Intelligence. The move “favors Hong Kong dollar over the US dollar now from a carry perspective.”

Inflows into Hong Kong stocks have also been supporting the local currency. Mainland Chinese traders have piled into Hong Kong stocks recently via the stock connect schemes, with southbound trading poised for a third month of net buying, according to data compiled by Bloomberg.

Still, a break of the mid-point of the trading band doesn’t mean the Hong Kong dollar will head straight to the strong end.

That’s because traders may be reluctant to flip to long positions in the currency versus the greenback, with the Fed expected to keep hiking rates to combat inflation. Also, concerns over Beijing’s tighter control over the Asia financial center and a recent increase in China’s Covid cases could also hurt sentiment toward Hong Kong assets.

The Hong Kong dollar was little changed around 7.8089 on Tuesday.

Meanwhile, bearish wagers on the currency have eased in the options market. Three-month risk reversals for the US-Hong Kong dollar pair, a gauge of its expected direction over that time frame, have retreated from their highest in more than two years.

--With assistance from John Cheng.