(Bloomberg) -- Bearish bets on the Hong Kong dollar are gaining traction as a slump in local borrowing costs dulls the appeal of the currency versus the greenback.
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The Hong Kong dollar has fallen nearly 1% from an 18-month high in December. That's because the city's one-month interbank borrowing rate slid, widening its gap with the US equivalent by the most since 2008. The large spread makes it lucrative for traders to borrow Hong Kong's currency cheaply and sell it against the higher-yielding greenback.
Bill Ackman the billionaire founder of hedge fund Pershing Square Capital Management LP said in November he was betting against the Hong Kong's currency and its peg with the greenback citing the city's weak economy. Kyle Bass, the founder of Hayman Capital Management and George Soros have also wagered on a collapse of Hong Kong's currency peg in the past.
But the city's officials have repeatedly said that the almost 40-year-old peg which keeps the Hong Kong dollar boxed in a trading band of 7.75-7.85 per greenback works well and there are no plans to change it. The Hong Kong dollar rallied late last year after a months-long intervention, where the city's monetary authority mopped up the local currency, pushed up borrowing costs high enough to discourage carry trades against the local dollar.
Since then the benchmark one-month Hong Kong Interbank Offered Rate has renewed its decline as funding demand for year-end settlement eased and a spike fueled by increased equity trading following China's reopening abated, analysts said. The one-month Hibor is now about 160 basis points below the London Interbank Offered Rate of the same tenor after being close to 90 basis points above that gauge in early December.
The drop in Hibor was from "a very high base, exacerbating the steepness of it," said Kelvin Lau, senior economist at Standard Chartered Bank (HK) Ltd. in Hong Kong. Back in December, the banking sector expected liquidity tightness crossing the new year and the Lunar New Year, which subsequently normalized. "The combination of a less hawkish Federal Reserve outlook and improved reopening prospects locally also probably fueled expectations of renewed capital inflows," Lau added.
The Hong Kong dollar may stay near the weaker-half of its trading band, according to Oversea-Chinese Banking Corp. "USD/HKD is more likely to stay above 7.80 in the near term given the fairly negative Hibor-Libor spreads, although room for the spreads to turn yet more negative is limited," said Frances Cheung, a Singapore-based rates strategist at the firm.
The city's currency was little changed at 7.83 per greenback at 4:41 p.m. local time Friday.
(Updates with background on bearish bets on Hong Kong dollar in third paragraph.)
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