Tuesday, July 14, 2020
Martin Hennecke

HK dollar rises as liquidity tightens
<p>The Hong Kong dollar yesterday rallied as much as 0.12 percent to HK$7.8270 per greenback, its strongest since late December, as protests against the extradition law continued to rock the city.</p><p>Liquidity has been tightening in the city with the one-month Hong Kong Interbank Offered Rate surging to 2.42286 percent, the highest level since October 2008. Bears are also being squeezed by a surge in the cost of shorting the currency, as the Hong Kong dollar&#39;s 12-month forward points rise to the highest since January 2017.</p><p>Shorting the Hong Kong dollar has been a popular trade since 2017, as investors borrowed the currency cheaply and sold it against the higher-yielding greenback.</p><p>That sent the local dollar to the weak end of its trading band many times and prompted the Hong Kong Monetary Authority to intervene. The de facto central bank has spent US$2.8 billion (HK$21.8 billion) since the start of March to defend its foreign-exchange peg with the greenback.</p><p>Demand for cash usually increases in June, as banks hoard money for regulatory checks and corporate clients pay dividends. Chinese e-commerce giant Alibaba&#39;s planned initial public offering in the city has also raised expectations for tighter liquidity.</p><p>The jumping Hibor has helped narrow a discount to the borrowing costs on the greenback to the smallest since April.</p><p>Meanwhile, the HKMA yesterday said that Hong Kong&#39;s banking system is safe and sound, and local banks have sufficient capital with strong liquidity, foreign exchange market, and money market of Hong Kong dollar are in orderly operation.</p><p>Meanwhile, Fitch affirmed Hong Kong&#39;s AA+ credit rating yesterday, citing strong public finances and a resilient economy.</p><p>But the rating could come under review if there is &quot;a move towards greater alignment of institutional and regulatory frameworks that diminish the autonomy of Hong Kong with respect to the factors that support its higher credit rating relative to mainland China,&quot; the agency said, commenting on the extradition bill.</p><p>The impact of the protests on the Hong Kong economy will depend on the local government&#39;s attitude, said Hong Kong Small and Medium Enterprises Association honorary chairman Danny Lau Tat-pong.</p>

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