Hong Kong’s dollar strengthens toward higher end of trading band against US dollar as interbank rate rises

Hong Kong’s borrowing costs are stuck near decade-highs, adding momentum to the local currency.

The Hong Kong dollar traded in the stronger half of its band against the US dollar for the first time since September, rising as much as 0.18 per cent to 7.7995.

While local interbank rates dipped Tuesday, the cost to borrow the currency remains higher than the income a trader can expect on US dollars. That’s killing the Hong Kong dollar carry trade by making money more expensive in the city.

Rates are likely to remain elevated in July, according to Carie Li, an economist at OCBC Wing Hang Bank. While the tight liquidity is coinciding with dramatic street protests, just like last month, market watchers see other reasons for the trend: companies are hoarding cash to pay quarterly dividends and at least two large share sales may lock up funds. By contrast, US interest rates are dropping as the Federal Reserve prepares to ease monetary policy.

“Given the low aggregate balance, these tightening events will keep market players cautious and prompt them to continue hoarding cash,” Li said.

Li said one- and three-month interbank lending rates, known as Hibor, are likely to stay above 2 per cent in July. One-month Hong Kong dollar Hibor was at 2.49 per cent on Tuesday and the three-month rate was 2.44 per cent, dipping slightly from last week. Hong Kong’s financial markets were shut for a holiday on Monday.