In a year of currency surprises from Turkey to Argentina, add another shocker to the list: a 0.6 percent rise in the Hong Kong dollar.
The former British colony’s sleepy foreign exchange market yesterday suddenly came to life, propelling the dollar to its biggest gain in 15 years.
In a territory that keeps its currency on one of the world’s tightest leashes, swings greater than 0.4 percent have only happened three times since Hong Kong widened its trading band in 2005.
“The strengthening came as a huge surprise,” said Mingze Wu (吳明哲), a Singapore-based trader at INTL FCStone Global Payments.
The trigger for yesterday’s gain was something of a mystery. Theories include rising local borrowing costs, position adjustments before upcoming holidays and a buying stampede by short sellers hit with stop losses.
Traders who have been selling the Hong Kong dollar to buy higher-yielding US assets could face a painful squeeze, particularly if they loaded up on leverage to amplify returns.
Derivatives dealers are already bracing for more volatility: A gauge of expected price swings derived from the options market doubled yesterday. Potential catalysts for further turbulence include an expected US Federal Reserve interest rate hike later this month and an increase in Hong Kong banks’ so-called prime rate — something that has not happened since 2006.
The risk for Hong Kong is that higher borrowing costs could trigger a downturn in the territory’s property market, which is by some measures the world’s most expensive.
Home prices in Hong Kong, where real estate is practically a religion, have soared 16 percent over the past 12 months, extending a relentless upward march for most of the past 15 years, a Centaline Property Agency index showed.
A jump in outstanding mortgages pushed the territory’s household debt-to-GDP ratio to a record in the second quarter of this year.
The Hong Kong dollar, which is subject to a trading band of HK$7.75 to HK$7.85 against the greenback, has been stuck near the weak end of that range for the past six months, due in part to selling by carry traders.
However, that dynamic might now be starting to change: The difference between the territory’s three-month interbank borrowing costs and those of the US has narrowed by nearly 1 percentage point since March, when the gap reached its widest in a decade.
The currency yesterday climbed as much as 0.6 percent to HK$7.7930 per US dollar, the strongest level since November last year.
The Hong Kong dollar’s three-month interbank borrowing cost jumped to the highest level in nearly a decade.
“Traders may have come to believe the interest rates will keep rising, with some of them unwinding short-Hong Kong dollar carry trades, and that triggered stop losses and a stampede,” DBS Hong Kong Ltd managing director for treasury and markets Tommy Ong (王良享) said.
His near-term forecast for the exchange rate: somewhere between HK$7.80 and HK$7.83.
Sue Trinh, head of Asia foreign exchange strategy at Royal Bank of Canada in Hong Kong, predicted that yesterday’s move would be short-lived.
She forecast that the currency would weaken again as the territory’s economic growth slows alongside China’s.
“In the longer term, the gains are not sustainable,” Trinh said. “The Hong Kong dollar will be back to HK$7.85 in due course.”
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