The Hong Kong dollar strengthened on Friday on renewed speculation of a Chinese yuan revaluation, but pared some of its gains by late afternoon as players covered short dollar positions ahead of the release of a key US employment report. The local currency firmed to 7.7709 per US dollar in early afternoon - its highest level since mid-February - before easing back to 7.7727/29 versus 7.7790/92 in late Asian trade on Thursday.
Meanwhile, the discount on one-year forwards was trading at 1,320/1,300 pips, off a session low of 1,350/1,330 pips and wider than Thursday's close of 1,200/1,180 pips.
"Recently more China officials have been commenting on the exchange rate, spurring market expectation of a near-term change in China's currency policy," one dealer from a local bank said.
"Some market watchers see China will make a move in the first quarter of next year."
Speculation in the yuan intensified on Thursday after top officials from China's foreign exchange regulator and central bank were quoted by Chinese media as saying they hoped to have a more flexible exchange rate and had made fundamental preparations.
The premium on one-year non-deliverable Chinese yuan forwards rose to 3,750 points from 3,050 points on Thursday.
The Hong Kong dollar is pegged at 7.80 to the US dollar but it is often seen as a proxy for the Chinese yuan as the two economies become more closely integrated.
Earlier this month, the head of territory's de facto central bank said Hong Kong would expect to keep its currency link to the US dollar even if Beijing made the yuan more flexible.
"There was some dollar buying after the London market entered. People might cover short positions ahead of tonight's US economic data," another dealer.
Hong Kong interest rates tend to track US rate moves because of its currency peg to the US dollar.
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