HONG KONG: The Hong Kong dollar rose for the first time in eight sessions, rebounding from its weakest since mid-June, as short sellers were seen taking profits.

The currency gained 0.11% to HK$7.8175 versus the greenback as of 12:51 p.m. local time, set to snap a seven-day loss of about 0.5%. The advance comes as its three-month forward points climbed the most in two weeks, reflecting higher funding costs in the currency market. 

The Hong Kong dollar’s interbank interest rates slipped, indicating that liquidity in the money market was ample.

The Hong Kong dollar has been on a roller-coaster ride over the past month, with the currency surging to a two-year high on a liquidity squeeze and then plunging after the suspension of a large initial public offering in the city. 

Behind the dramatic moves were wild swings in Hong Kong’s funding costs that were fueled by seasonal factors such as dividend payments. A smaller interbank liquidity pool amplified the volatility.

“The recent correction of interest rates to low levels will offer an attractive entry point for investors to acquire funding in the currency,” said Ken Cheung, senior Asian foreign-exchange strategist at Mizuho Bank Ltd., who added that short sellers may be taking profits. 

“The Hong Kong dollar will largely trade between HK$7.8 to HK$7.83 in the near term.”

Shorting the city’s dollars was a winning strategy for years as investors borrowed the currency to invest in higher-yielding greenback. The trade pushed the Hong Kong dollar to HK$7.85 repeatedly since 2018, forcing the authorities to intervene.

Analysts can’t agree on whether the Hong Kong dollar will retreat to the weak end of the trading band soon. Cheung said it won’t because the Federal Reserve’s rate cuts will make American assets less appealing. 

However Bank of America Merrill Lynch sees more official intervention by year-end as the city’s liquidity will become plentiful again. - Bloomberg