It’s going to get wilder for HK dollar traders

Bloomberg

One assessment of the Hong Kong dollar’s dramatic turnaround in recent months is that it’s a sign of things to come.
The moves reveal structural tightness in the city’s liquidity conditions, according to Morgan Stanley. Hong Kong banks have far less idle cash on hand, after the amount of funds on loan soared to the highest since 2002 relative to deposits. Throw in a diminished pool of interbank liquidity and potentially high demand for the currency, and wild moves in local short-term rates are likely to occur more often.
Volatility in the city’s interbank rates has been especially acute since mid December, stoking a nearly 0.8% gain for the Hong Kong dollar in a month — a
big move for a pegged currency. While analysts initially blamed the sudden strength on seasonal demand for cash and an unwind of short positions, the Hong Kong dollar has continued to gain in January. It rose to the strongest level since early 2017 last week, only months after flirting with the weak end of its trading band with the greenback.
Liquidity in Hong Kong’s financial system was so tight last month that banks had to resort to authorities more often for short-term cash.