The Hong Kong dollar has advanced to its strongest since May 2017 as tight liquidity in the city keeps borrowing costs elevated.
The currency rose as much as 0.19 per cent to 7.7827 versus the greenback yesterday, days after it started trading in the strong half of its band this week for the first time since last September.
The local one-month interbank rate rose 29 basis points to 2.99 per cent - the highest in over a decade - and the overnight Hong Kong interbank offered rate rose 84 basis points to 3.14 per cent.
Local money rates are surging as companies hoard cash to pay for dividends and large share sales lock up funds, outstripping the income a trader can expect on US dollars.
That is undermining a once-popular trade to sell the Hong Kong dollar and buy the greenback that had pushed the city's currency to the weak end of its trading band only months ago.
The tighter liquidity has also coincided with recent demonstrations in Hong Kong.
"Hong Kong dollar movement comes with liquidity tightness," said Ms Frances Cheung, head of Asia macro strategy at Westpac Banking Corp. The liquidity situation will persist until after the second large share offering, she added.
The Asia-Pacific arm of Anheuser-Busch InBev this week started preparing for a listing that could raise as much as US$9.8 billion (S$13.3 billion), while Alibaba Group Holding is said to have filed for an initial public offering (IPO) that could raise US$20 billion.
"We haven't seen such a large IPO for a while, and it is happening during the dividend season when liquidity is usually tight," said Ms Carie Li, an economist at OCBC Wing Hang Bank, commenting on the AB InBev listing.
Analysts from Bank of America Merrill Lynch estimated in May that Hong Kong-listed Chinese companies will need to pay US$55 billion worth of dividends this year, mostly in June and July.
On top of equity market demand, "you also have carry trades squaring their positions", Ms Li said.
A previously wide spread between US and Hong Kong rates led investors to borrow Hong Kong dollars cheaply to buy higher-yielding US dollar assets in a "carry trade", spurring capital outflows and pressure on the local currency.
But that gap largely closed in June. The Hong Kong dollar rose 0.33 per cent against the greenback that month, its largest monthly gains since September 2008.
Demand for cash also surged in June as protesters clashed with police during a mass demonstration against legislation that would allow citizens to be extradited to China.
Financial institutions rushed into liquid assets, with interbank interest rates soaring across the curve.
Traders said the interest rate spike this time, however, was driven mainly by the city's mega IPO, although demand for cash had also bolstered the local currency.
Earlier this week, unrest gripped the city again as hundreds of protesters in the former British colony stormed and ransacked the legislature after a demonstration marking the anniversary of Hong Kong's return to Chinese rule.
The Hong Kong Monetary Authority spent HK$22.1 billion (S$3.8 billion) in March to defend the currency's peg. The peg means Hong Kong's de facto central bank effectively imports US monetary policy.
BNY Mellon Investment Management's senior sovereign analyst Aninda Mitra said Hong Kong's credentials as a financial hub will stay intact, not least for its role as a key fundraising centre for Chinese companies. "In that context, I don't think the underlying bedrock of Hong Kong's status is at risk," he said yesterday.
"Will geopolitics somehow destabilise that? It's a very long shot."