Disconnect for HKD in stocksHong Kong's weak dollar is a victim of
surging Chinese stocks and the cost of defending its currency is mounting as the local dollar remains stuck at the weak end of its trading band.
The rally in Chinese stocks has been bad news for the local dollar. Equity investors are selling the currency for the yuan and
buying mainland shares through the stock trading connects, according to Ronald Man, a strategist at Bank of America Merrill Lynch.
That's keeping the Hong Kong dollar lower in the spot market, he said. The currency has been at the weak end of its trading band for much of this month.
The Monetary Authority bought HK$2.01 billion on Monday. It has
spent HK$7.4 billion this month purchasing local dollars as low interest rates make the currency less attractive to hold compared with the higher-yielding greenback and yuan.
While the interventions help drain interbank liquidity, as measured by the aggregate balance, borrowing costs in the city remain low.
The Hong Kong dollar was at HK$7.85 per greenback as of 5.45 pm yesterday, while the one-month interbank rate on the currency was little changed at 1.5729 percent, the highest since January 8, compared with 2.48 percent for those in the US.
Analysts last week predicted the HKMA would need to
spend another HK$50 billion at least before rates rose sharply.
Net northbound fund flows climbed to around 130 billion yuan this year as of Monday, with sentiment helped by Beijing's looser monetary policy and an easing of trade tensions with the US.
The market could be further supported by foreign inflows, as MSCI expands the weighting of mainland-listed shares in benchmark indexes tracked by global investors.
"Positioning and risks suggest the depreciation in the Hong Kong dollar is more supported by equity investors via the stock connect than before," Man said, adding that the currency will hover near HK$7.85 per greenback - the weak end of its trading range - in the "foreseeable future."
The yuan was little changed at 6.7132 to the US dollar as the Shanghai Composite Index slipped 0.2 percent after jumping 2.5 percent on Monday, its biggest gain in three weeks.
Source: BLOOMBERG
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It's all about "how much you made when you were right" & "how little you lost when you were wrong"