This is an excerpt from MACRO BRIEF: Hong Kong Dollar Strengthens on Rate Spike originally published March 10, 2019.
The short-HKD trade is nearly consensus, which reminds me of the short-yuan trade a few years ago that was largely snuffed out by the PBOC.
Problem here, though, is the HKMA's attempts to draw in HKD inflows have been superficial at best. Additionally, with China likely continuing using Hong Kong as a dollar ATM it is hard to estimate how long the strength would last.
The 3.7 sigma move has pulled in quite a bit but still remains extended. 7-day ROC saw its largest spike since December when the HIBOR 1M and 3M futures converged.
7- and 30-day ROC in HKDUSD; HIBOR 1M and 3M Futures
We'll continue to monitor the situation, but prolonged elevation of rates could be a problem considering that Hong Kong's economy is strongly interest rate sensitive with banking assets and domestic credit to public sector as a percentage of GDP at well over 200 percent.