How long can it last?
That is what watchers of Hong Kong’s markets are asking as the gap between local and US interbank rates widens to the most since 2009.
The territory’s currency peg to the greenback effectively ties its monetary policy to that of the US, making the growing differential all the more curious.
Things might be changing, with forward points and interest-rate swaps in the Hong Kong dollar starting to bottom out.
The reasoning is simple: With the currency having fallen to the middle of its permitted band and the US expected to continue raising rates, it is a matter of time before the exchange rate reaches its weak limit, forcing the local monetary authority to suck in liquidity.
“Once the Hong Kong dollar depreciates to a certain point, people will start to be scared there will be capital outflows, which should cause rates to rise,” Mizuho Bank Ltd foreign exchange strategist Ken Cheung (張建泰) said in Hong Kong. “We’re at this point now.”
As the gap between Hong Kong’s interbank offered rate (HIBOR) and the London interbank offered rate widened, the Hong Kong dollar has weakened 0.7 percent this year, putting it on course for its worst year since the current band was put in place in 2005.
It traded at HK$7.8109 yesterday, compared with a one-and-a-half-year low of HK$7.8139 reached on Monday.
The three-month HIBOR yesterday rose 0.4 basis points, the most since June 12.
One way the Hong Kong Monetary Authority could absorb funds before the currency reaches the weak end of its HK$7.75 to HK$7.85 band is by issuing Exchange Fund Bills.
Still, this is unlikely as the de facto central bank would not want to give the impression it is trying to sway HIBOR, Bank of America Corp strategist Ronald Man (文略韜) wrote in a note.
It remains to be seen whether market sentiment has changed as forward points and swaps might have rebounded because of seasonal demand for the local currency at the end of last month, Shanghai Commercial Bank Ltd (上海商業銀行) head of research Ryan Lam (林俊泓) said in Hong Kong.
“Such a wide Hong Kong dollar-US dollar gap is not normal,” he said. “Will Hong Kong dollar rates rise more quickly? I think so.”
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