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HK spends HK$9.5b defending currency overnight

Hong Kong

HONG KONG intervened to defend its currency peg for a second day after the city's dollar fell to the weak end of its trading band.

The Hong Kong Monetary Authority bought HK$9.5 billion (S$1.63 billion) of local dollars overnight, the third-biggest intervention since the defence began last month. The HKMA mopped up HK$1.57 billion on Wednesday. Lower rates than the US have made the Hong Kong dollar an attractive target for shorting.

The de facto central bank has now spent US$7.95 billion protecting its currency system, which has the effect of tightening liquidity in a city that's grown fat on ultra-low borrowing costs. Hong Kong, which imports US monetary policy, is facing the prospect of significantly higher rates for the first time since the financial crisis.

The three-month borrowing rate is 1.75 per cent, near the highest since December 2008, and up from 0.8 per cent a year ago. The Hong Kong dollar was little changed at HK$7.8498 per greenback at 3pm local time on Thursday.

"The HKMA may need to mop up more liquidity and push the aggregate balance towards HK$100 billion this week," said Carie Li, a Hong Kong-based economist at OCBC Wing Hang Bank Ltd. "But the Hong Kong dollar will rebound starting next week, as funding needs to increase at month-end. Liquidity will tighten further in June due to an expected interest rate hike in the US and potential funding demand fuelled by Xiaomi and China Tower IPOs."

Ms Li said Hong Kong lenders will lift deposit rates as liquidity conditions tighten. "Banks are likely to increase the prime rate around mid-year, which will hurt property market sentiment, especially for mortgage borrowers. The home market may see a correction and slower growth this year." BLOOMBERG

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