HONG KONG: The closely-controlled Hong Kong dollar saw its biggest spike since 2003 on Friday (Sep 21), pulling it off the lower end of its narrow trading band, where it had been stuck for six months.
The Hong Kong dollar advanced as much as 0.6 per cent to HK$7.7929 per US dollar, its biggest gain since 2003 and its strongest level since Nov 8 last year. Since March, it had stayed near 7.85, the lower end of the Hong Kong Monetary Authority’s (HKMA) managed trading band.
Swings greater than 0.4 per cent have only happened three times since Hong Kong widened its trading band in 2005, Bloomberg reported.
“The strengthening came as a huge surprise,” said Mingze Wu, a Singapore-based trader at INTL FCStone Global Payments.
Traders could not entirely explain the move, although some pointed to a rise in local money market rates as evidence that domestic banks might raise their lending rates next week, in reaction to another possible rate rise by the US Federal Reserve.
Other possibilities included upcoming public holidays and an announcement by China's central bank that it will start issuing its bills in the former British colony which stoked speculation about a reduction in offshore yuan supplies.
“It could possibly be a combination of a few factors at play that are causing fears of liquidity tightening,” said Mr Albert Leung, a strategist at Nomura.
“The Aggregate Balance is lower than before, there is some money locked up in IPOs. Also, there is the mid-Autumn festival and the month-end coming up. There is some fear post-FOMC next week, where the expectation is for a rate hike, that there could be an increase in Hong Kong’s prime rate,” he added.
While the unit's peg to the US dollar means the city's monetary policy follows the Federal Reserve, an abundance of cash in the financial system has previously prevented the prime rate - which affects mortgages - from rising.
Traders are awaiting next week's Fed policy meeting, where it is expected to lift interest rates again, while its statement will be pored over for forward guidance regarding further hikes.