Short-lived market rally buoys struggling dollar

Tighter liquidity concerns enabled short HKD traders to take profit in advance.

A short-lived market rally has strengthened the struggling Hong Kong dollar, according to OCBC Bank Research, as concerns over tighter liquidity encouraged short HKD traders to take profit in advance.

This comes as the Hong Kong Monetary Authority has stepped in consecutively since April 12 to purchase local currency in defense of the dollar’s currency peg with the greenback which reduced the aggregate balance to $128.5b. The HKD plunged to a thirteen year low after trading at $7.85 as the interest rate between the US dollar and the HKD widened even further, prompting the first intervention from the central bank since 2015.

OCBC expects the USD/HKD to stay below the weak end of the trading band at 7.85 before the month ends but may pick up pace again and prompt renewed intervention after a short breather.

“If the downward pressure on the Hong Kong dollar persists, policy makers are likely to step up its intervention over the coming months,” Chang Liu, China economist at Capital Economics, wrote in a note dated Friday.

Financial secretary Paul Chan also cautioned homebuyers that steeper interest rates may loom in the near future, urging consumers to pay closer attention to the increase in interest rates to asset prices.

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OCBC, however, took a more optimistic forecast. “However, with a further decrease in interbank liquidity, the resultant narrowing of yield differential will likely tame carry trade activities. Therefore, aggregate balance may not drop too rapidly or too drastically to cause any spike in local interest rate.”