Stephen Innes, a senior trader at OANDA Asia-Pacific, said the yuan continues to face headwinds, while speculation on Hong Kong dollar would continue.

“I do not see the weakness in the Hong Kong dollar as anything out of the norm especially given the recent Fed hike, which in itself pressures the local unit from an interest differential perspective. However, the market started to get a bit too excited with unfounded rumours circulating regarding the peg giving way,” Innes said.

“I suspect that perhaps contributed to overzealousness from the speculative community, causing the overshoot.”

He said trading had slowed considerably leading into the Lunar New Year, but added that he expects “the offshore yuan to come under renewed pressure after the Chinese New Year holidays”.

Under the peg arrangement, the Hong Kong Monetary Authority (HKMA) intervenes whenever the currency trades close to the strong end at 7.75 or the weak end at 7.85. January marked the first time in a decade the HKMA needed to support the currency from falling to the weak end of the peg.

The Hong Kong dollar traded at the strong end of the peg on Friday. On a weekly basis, the currency reported its first weekly gain of the year, rising 0.12 per cent this week, after three weeks of falls. But for the month, the local currency has lost 0.51 per cent against the US dollar, the biggest fall since the peg was adopted in 1983.

The currency once hit 7.8294 last week, an eight-and-a-half-year low, as speculators attacked the peg amid concerns of capital outflow from the stock markets and a slowdown in the Chinese economy. The Hang Seng Index at one point dropped to the lowest in three years, losing 10.18 per cent for the whole of January. It lost 7.16 per cent last year.

HKMA chief executive Norman Chan Tak-lam has maintained the authority’s determination to keep the peg. Hong Kong dollar recently bounced back after hefty buying orders, which currency traders believe was HKMA intervention to prevent it from falling too low, pushing it to above 7.80.

The Hong Kong dollar three-month interbank rate, or Hibor, shot up to a five-year high to 0.69 per cent on Friday.

Jasper Lo Cho-yan, director of Tung Shing Futures, said the Hong Kong dollar would continue to be low and the interbank interest rate high.

“The speculators won’t disappear but will keep coming back to test the peg. They may particularly like to speculate on the local currency in the overseas markets during the night trading hours or the Chinese New Year holidays in Hong Kong. HKMA officials have a busy time ahead in February,” Lo said. “Offshore yuan will continue to be volatile in the near term.”

Offshore yuan saw a big swing this month as it once fell 1.72 per cent in the first week of the year, which led to intervention by the People’s Bank of China (PBOC) to drive offshore yuan borrowing cost up to 200 per cent in a bid to fend off speculators. The currency stabilised at about 6.60 levels and eventually closed down 0.66 per cent for the whole month.

International speculators are betting it will weaken 10 to 15 per cent this year due to the economic slowdown and capital outflows. The PBOC and the central government have said they are committed to a stable currency.

Onshore yuan remained flat at 6.5766, weaker by 0.05 per cent from Thursday. Onshore yuan reported a 0.03 per cent gain this week but lost 1.32 per cent for the month, after losing 4.63 per cent last year.

The spread between the onshore and offshore yuan narrowed to 345 basis points on Friday, down from a record 1,400 basis points on January 7.