The Hong Kong market witnesses history!

According to Bloomberg on Tuesday (December 31), the Hong Kong Dollar against the USD reached 7.7609 yesterday, the highest since June 2021, with the increase in December's Exchange Rates expanding to 0.3%. At the same time, the overnight Hong Kong Interbank Offered Rate (Hibor) rose to 6.5%, a historic high. Additionally, the one-month Hibor on Monday was quoted at 4.59%, approximately 23 basis points higher than the comparable USD borrowing costs, marking the largest gap in a year.

Analysts pointed out that as the end of the year approaches, the demand for HKD tends to strengthen, and Banks need to supplement liquidity to meet regulatory requirements. Additionally, the increase in dividends by Chinese companies listed in Hong Kong and the rising interest of mainland investors in the Hong Kong stock market have also driven the demand for HKD.

On December 31, the Hang Seng Index rose by 0.09%, while the Hang Seng TECH Index fell by 0.72%. Due to the New Year's holiday, Hong Kong stocks will have an afternoon trading halt today, and the market will be closed all day on January 1, 2025. For the entire year of 2024, the Hang Seng Index has accumulated an increase of nearly 18%, and the Hang Seng TECH Index has accumulated an increase of nearly 19%.

HKD creates history.

On Monday, the HKD reached 7.7609 HKD to 1 USD, marking the strongest level since June 2021, with the exchange rate increasing by 0.3% in December. Meanwhile, the overnight Hong Kong Interbank Offered Rate (Hibor) rose to 6.5%, reaching a historical high.

According to data from the Hong Kong Association of Banks, the one-week Hibor rose 56.3 points on Monday to 6.1%, the highest since October 4, 2007, while the one-month interbank rate related to mortgage loans reported at 4.59%, which has risen for 9 consecutive days, hitting a two-month high.

Some analysts pointed out that as the end of the year approaches, the demand for HKD tends to strengthen, and Banks need to supplement liquidity to meet regulatory requirements. Additionally, the increase in dividends by Chinese companies listed in Hong Kong and the rising interest of mainland investors in the Hong Kong stock market have also driven the demand for HKD. Coupled with the earlier forecast by the Federal Reserve of fewer interest rate cuts next year, and the potential inflation triggered by Trump taking office next year, this has also recently supported the strength of the USD exchange rates, making the HKD, which is pegged to the USD, stronger.

Ken Cheung, Chief Asian Forex strategy Analyst at Mizuho Bank, stated that the rise in Hibor may be due to tight liquidity of the Hong Kong dollar approaching year-end and the low surplus of the Hong Kong dollar. At the same time, the interest rate differential between the Hong Kong dollar and the USD, along with demand triggered by dividends, is expected to push the Hong Kong dollar above 7.76.

According to data from the Hong Kong Monetary Authority, Hong Kong Banks borrowed 0.944 billion HKD from the discount window last Friday (27th), with funds returned on Monday, causing the surplus in the Hong Kong banking system to fall back to 44.802 billion HKD. According to Bloomberg compiled data, the Hong Kong Monetary Authority injected 4.79 billion HKD of liquidity through the discount window on October 7, the highest since December 2019. Banks made use of this discount window about six times within a month, with the second highest scale at 3.3 billion HKD. Meanwhile, the one-month Hibor rose to approximately its highest level in two months. At that point, as the supply of the Hong Kong dollar was tight and the local stock market surged, investor demand for Hong Kong assets pushed up Hibor.

Is money flowing from US stocks?

Due to the linked exchange rate system, the exchange rate of the Hong Kong dollar against the USD is limited to a Range of 7.75 to 7.85. The tightened liquidity has caused Hong Kong interest rates, which usually adjust in line with US rates, to exceed the latter. According to Bloomberg's calculations, the one-month Hibor was reported at 4.59% on Monday, which is about 23 basis points higher than the comparable Indicator measuring the cost of borrowing in USD.

With the strengthening of the Hong Kong dollar exchange rate, every 100 Hong Kong dollars exchanged for onshore Renminbi reached a new high of 92.128 since 2007, while every 100 Hong Kong dollars against offshore Renminbi once peaked at 94.28, equivalent to the historical high set on the 19th of this month. Independent forex commodity Analyst Lu Churen expects the Renminbi against the Hong Kong dollar to fluctuate between 93.46 and 95.24 in the short term.

Liu Zuode, Executive Director of the Global Economic and Financial Research Institute, stated that as the end of the year approaches, banks face a shortage of funds for borrowing, leading to an increase in Hong Kong interest rates. Additionally, with dividend payout days approaching for Chinese-funded enterprises and significant funds flowing into the market from US stocks recently, it is believed that some of it has directed towards the Hong Kong market, increasing demand for the Hong Kong dollar and pushing up both HK interest rates and the performance of the HK dollar.

Besides the reasons mentioned above, Lu Churen believes that the rise in Hong Kong exchange rates and interest rates is also related to tightened bank liquidity or lack of confidence, making banks reluctant to lend Hong Kong dollars out to the market.

Undoubtedly, the seasonal cash crunch has added extra momentum to the Hong Kong dollar, which has moved against the trend of the decline of Asian currencies in the past three months. Wind data shows that since the beginning of 2024, the USD has continued to strengthen, with the USD increasing by 4.83% this year, a significant rise for the forex market. The USD index even broke 108 at the end of November, reaching a new high in over two years, demonstrating strong performance throughout the year.

As of December 11, data from Wind shows that among 11 currencies, only the Hong Kong Dollar has appreciated against the USD, while the other 10 currencies have all depreciated against the USD. The Ruble has depreciated the most, with the USD rising 14.5% against the Ruble (which means the Ruble has fallen by 14.5%), followed by the New Zealand Dollar, Japanese Yen, Canadian Dollar, and Australian Dollar, all of which have declined significantly by over 6% against the USD. However, the British Pound, Singapore Dollar, and Renminbi have remained strong, with only slight declines of under 2% against the USD. Together with the Hong Kong Dollar, these can be considered the four most resilient non-USD currencies in 2024.

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