Demand for cash Is surging in Hong Kong

HONG KONG: Hong Kong dollar traders are pricing in tighter liquidity, with a gauge tracking the demand for cash jumping to the highest level since early 2016.

The currency’s three-month forward points surged to as high as 70 Monday, surpassing the intraday peak of 46.09 seen in mid-August. It shows the supply of cash in the foreign-exchange market is expected to tighten, which tends to support the local dollar by squeezing shorts.

Potentially the biggest factor mopping up liquidity is Alibaba Group Holding Ltd.’s plan to start taking orders this week for a massive share sale in Hong Kong. Banks are also likely to be hoarding cash for year-end regulatory checks. Making matters worse were concerns over capital flight, as citywide protests turned violent when police shot and wounded two demonstrators Monday morning.

Cash supply of the offshore yuan also tightened, with the currency’s three-month forward points soaring to the highest in two months Monday. Trading has become less active, resulting in limited liquidity, as several financial institutions have sent their staff home amid the protests, according to three traders who asked not to be named.

"During this lock-up period, the Hong Kong dollar rates will remain elevated and the currency will be strong,” said Stephen Chiu, an Asia foreign-exchange and rates strategist at Bloomberg Intelligence.

"The Hong Kong dollar could move a tad weaker to 7.84 to 7.85 towards year-end after the lockup is over.”

The Hong Kong dollar fell 0.04% to 7.8328 per greenback Monday, after posting its best weekly advance since mid-September. The currency’s funding costs in the interbank market also rose, with a key indicator climbing to the highest level since September. - Bloomberg