Hong Kong Conversion Rates

Bloomberg News

The Hong Kong dollar is staying stubbornly strong even after the city’s de facto central bank weakened the currency for the first time in a year and a half.

The strength of the currency is unlikely to go away anytime soon because of a combination of factors: continued cross-border borrowing of Hong Kong dollars and a surge of M&A activity in the city.

Of all the countries or territories in Asia Pacific, excluding Japan, Hong Kong was the busiest for cross-border deal activity with $16.6 billion worth of deals announced in the first half of the year alone, according to data provider Dealogic, ten times last year’s $1.65 billion of deal activity.

In an emailed statement Tuesday, the HKMA said M&A has helped drive demand for the Hong Kong dollar.

“There’s been hectic corporate demand for loans, supporting the value of the Hong Kong dollar, ” said a senior trader at a local bank, citing the fact that lenders build up funds in Hong Kong dollars to extend loans to their corporate clients.

Cross-border loan demand from Chinese companies has surged in recent years due to tight credit in mainland China and lower interest rates in Hong Kong. Banks in Hong Kong, including branches of mainland banks, saw loans to Chinese borrowers jump 30% last year to HK$2.276 trillion (US$293 billion), according to the HKMA.

At the same time, routine demand from corporates for dividend payments has helped support the strength of the Hong Kong dollar.

The Hong Kong dollar, which is pegged in a narrow range against the U.S. dollar, has risen 0.2% in last three months and has been trading near HK$7.75 a dollar, the strong end of its band against the greenback over last three weeks. In the afternoon of Asia’s session, the city’s currency is still trading stubbornly close to the band. A lower number indicates a stronger Hong Kong dollar.

On Tuesday, the Hong Kong dollar hit a high of HK$7.75 a dollar, on a public holiday in which local residents marched on the streets for democracy. The spike in the Hong Kong dollar triggered the HKMA to inject a total of US$1.63 billion into the foreign-exchange market in a hope to cool down the city’s currency.

The HKMA last intervened in the foreign-exchange market in the last three months of 2012, when capital inflows from abroad pushed up the city’s dollar to the top of its band, at a time when investor confidence in risky assets, including Hong Kong stocks, was rising.

The currency peg permits the Hong Kong dollar to trade between HK$7.75 and HK$7.85 to the U.S. dollar. The HKMA buys or sells the local unit whenever it touches either side of the band.

In the interbank market, the rate that banks charge each other for overnight borrowing in Hong Kong dollars has skyrocketed in recent sessions, and stood as high as 10% on Tuesday, according to local traders. It has retreated back to around 1% Wednesday. That’s still higher than normal, the rate is typically below 1%.

ANZ senior economist Raymond Yeung said the strength of the Hong Kong dollar was unrelated to the protests but warned the currency faces risks.

“We do notice the rising risk of political tension in Hong Kong and its possible impact on economic fundamentals, ” he said in a research note. “Hong Kong’s long-term economic competitiveness is on the table.”

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