Hong Kong dollar plumbs to weak end of band as U.S. rates rise

By Alun John

HONG KONG, April 20 (Reuters) - Surging U.S. yields and a surfeit of cash in the local banking system have pushed the Hong Kong dollar to its weakest since late-2019, near levels at which the central bank might be forced to defend the peg.

The Hong Kong dollar HKD=D3 is pegged to a tight band of between 7.75 and 7.85 versus the U.S. dollar. It fell to as low as HK$7.8445 last week, its weakest since October 2019.

Under Hong Kong's linked exchange rate system, the defacto central bank Hong Kong Monetary Authority (HKMA) is obliged to buy its currency to stop it breaching the top of that band at HK$7.85.

"The interest rate differential (between the U.S. and Hong Kong) is pushing the exchange rate to the weak side," said Raymond Yeung, chief economist for greater China at ANZ, adding that this difference was caused by cash supplies in the domestic banking system being in surplus at a time when the U.S. Federal Reserve was getting aggressive about monetary tightening.

One-month U.S. dollar Libor USD1MFSR=X , a benchmark lending rate, is around 0.6% — its highest since April 2020, on the prospect of faster Fed rate hikes.

In contrast, the Hong Kong equivalent, one-month Hibor HIHKD1MD= , is under 0.2% and barely above its pandemic lows due to the abundance of cash in the Hong Kong financial system.

Yeung said another factor in the Hong Kong dollar's weakness has been the softness in initial public offerings (IPOs) in the financial hub as well as a weaker stock market, which typically attracted capital inflows.

"When we see a vibrant stock market in Hong Kong, we don't worry about the Hong Kong dollar trading at the weaker side," said Yeung.

Companies raised $1.7 billion in Hong Kong in the first quarter of this year, according to Refinitiv data, compared with $17 billion a year earlier. The benchmark Hang Seng Index .HSI has fallen 11.6%, year to date.

The HKMA last intervened in October 2020. That year, it sold HK$383.5 billion worth to rein in the strengthening currency, according to HKMA data. It last intervened at the weak end of the band in March 2019.

The peg has survived many attacks over the years, including from famed short-seller George Soros during the 1997-98 Asian financial crisis, but analysts don't see it coming under that kind of pressure.

"Inevitably, the longer (HK dollar weakness) goes on for, foreign investors will speculate again about the Hong Kong dollar peg," said Carlos Casanova, senior Asia economist at UBP, but added it was "not a huge risk" given the HKMA's massive reserves.

Redmond Wong, Hong Kong-based market strategist at Saxo Markets, also noted the absence of pressure in the swap market, with forward rates for the Hong Kong dollar well within the band.

HK dollar one-year forwards HKD1YV= were quoted at 7.804. The last time the HK dollar came under pressure in 2019, the level briefly traded above 7.85.
Reporting by Alun John; Editing by Vidya Ranganathan and Uttaresh.V

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