Friday, 13 April 2018

Sterling hits 10-week high vs dollar, 11-month peak vs. euro

LONDON (Reuters) - Sterling rose to a new 10-week high against the dollar on Friday and pulled itself out of a six-month trading range against the euro, prompting investors to unwind their long euro positions.

Against the euro, the pound has been trapped in a 86.5 pence to 90 pence per euro range for nearly six months, but cautious minutes from the European Central Bank this week and firm expectations of a rate hike from the Bank of England in May pushed the British currency to an 11-month high.

“This is a technical-driven rally caused by the currency breaking out of established trading ranges prompting a wave of position-covering by some funds but we need more fundamental drivers for the rally to sustain,” Danske Bank currency strategist Morten Helt said.

Against the euro, sterling rallied 0.4 percent to 86.32 pence per euro, its highest since late May 2017. On a weekly basis, it is set for its biggest gain since Dec. 1.

Sterling also pushed towards a new post-Brexit referendum high versus the dollar, rising 0.4 percent to $1.4296. It hit its highest since the 2016 vote in late January 2018, at $1.4346.

Expectations of a rate rise have been a major driver of sterling’s gains in recent days while the euro has suffered from more top policymakers’ comments about its recent strength, and some lacklustre data.

The market is pricing in a 65-percent chance of a 25 basis point hike next month.

HONG KONG (Reuters) - Hong Kong’s central bank intervened in the market for the first time since 2015 after its currency hit the weaker end of its trading range, nudging up a key lending rate that could pressure borrowing costs.

“I reiterate that the HKMA will buy Hong Kong dollars (HKD) and sell U.S. dollars at 7.85 level to ensure that the HKD exchange rate will not weaken beyond 7.8500,” Norman Chan, chief executive of the Hong Kong Monetary Authority (HKMA), said in a statement.

In U.S. trading hours, the central bank bought HK$2.442 billion (£218.6 million) of Hong Kong dollars from the foreign exchange market as the local currency hit the weaker end of its trading range.

On Thursday, it bought HK$816 million from the currency market.

This was the first time since the current trading band was introduced in 2005 that the weak-side convertibility undertaking (CU) at 7.85 to keep the Hong Kong dollar closely pegged to the U.S. currency had been triggered.

The HKMA said the undertaking was triggered in London trading hours.

The Hong Kong dollar touched the lower end of the central bank’s trading band target as the interest rate gap between the greenback and the local currency widened.

As the former British colony pegs its currency to the dollar, its money market rates should mirror those of its U.S. counterpart, but the gap has now widened to more than 117 basis points since the Federal Reserve started raising interest rates from ultra-low levels adopted in the 2008 financial crisis. Hong Kong’s markets have remained flush with excess cash, keeping a lid on Hong Kong dollar interest rates.

Most market participants do not see the current bout of weakness as a threat to the currency peg even though high liquidity stemming from Chinese and overseas investment into Hong Kong’s domestic markets is anchoring short-term interest rates and putting downward pressure on the currency.

The Hong Kong dollar is pegged at 7.8 to the U.S. dollar, but can trade between the high and low limits of 7.75 and 7.85. Under the currency peg, the HKMA is obliged to intervene when the Hong Kong dollar hits 7.75 or 7.85 to keep the band intact.

The currency traded at 7.8498 against the U.S. dollar at 0440 GMT.

“The HKMA is fully capable of maintaining the stability of the HKD and managing large scale capital flows. There is no need to be concerned,” Chan said.

BofA Merrill Lynch forecasts the Hong Kong dollar will stay around 7.85 per U.S. dollar for the rest of 2018.

The latest intervention, bringing the total amount of local currency bought to HK$3.258 billion, will reduce the aggregate balance - the sum of balances on clearing accounts maintained by banks with the HKMA - to HK$176.52 billion on April 16, according to Reuters data.

Three-month interbank rates in Hong Kong climbed 4.1 basis points to 1.21 percent in their biggest daily rise since end-November, putting pressure on local lenders to raise a key measure that influences mortgage rates.

“Hibor firmed up after the intervention and it’s clear that Hibor is trending up in a gradual and steady manner,” said Alan Yip, FX market analyst at Bank of East Asia.

BofA Merrill Lynch forecasts three-month Hibor will rise to 1.60 percent by year-end and the HKMA would have to buy HK$80 billion of Hong Kong dollars to push up Hibor meaningfully.

Hong Kong has raised its base rate charged through its overnight discount window twice in the past few months in lockstep with the Fed. The base rate now stands at 2.00 percent.

The city’s major banks have left their prime rates unchanged, although the HKMA has said it expects them to raise rates gradually.

Hong Kong’s U.S. dollar peg has forced it to keep monetary policy loose in recent years in step with the United States, but rock bottom interest rates have only fuelled the city’s real estate prices that are already among the highest in the world.

The monetary authority last intervened in the market in 2015, selling Hong Kong dollars as the local currency repeatedly hit the strong end of its trading band.

Reporting by Donny Kwok, Twinnie Siu and Saikat Chatterjee

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