HKMA intervenes as Hong Kong dollar weakens, buys HK$1.5b

[HONG KONG] The Hong Kong Monetary Authority (HKMA) stepped into the currency market again on Saturday in London and US trading hours, buying HK$1.51 billion in Hong Kong dollars as the local currency repeatedly hit the lower end of its allowable trading band.

The latest intervention will reduce the aggregate balance - the sum of balances on clearing accounts maintained by banks with the HKMA - to HK$74.8 billion on March 12, according to Reuters data. HKMA announced the intervention mid-Saturday.

Howard Lee, the authority's deputy chief executive, said the main reason for the move was the significant widening of the interest rate gaps between the Hong Kong dollar and US dollar after the year-end, mainly because of the drop in banks' funding demand, which led to a fall in the local currency's interbank interest rates. The Hong Kong dollar was weakened as traders sold the local currency for US dollars, he said.

The local dollar breached the weaker end of its trading range at 7.85 per US dollar for the first time in almost six months on March 6, and has hit that level repeatedly since.

Under the currency peg, the HKMA is obliged to intervene when the Hong Kong dollar hits 7.75 or 7.85 to keep the band intact.

Mr Lee said the HKMA would intervene again if the large gap between HKD and USD remained, which would likely keep the local currency weak in the near future.

HKMA last stepped into currency markets on Aug 28, when it sold US$1 billion worth of US dollars for the local currency at 7.85, as the Hong Kong dollar reached its band's weak side.

Excess cash in Hong Kong's banking system has kept interest rates low and caused the currency to weaken since the start of 2019, analysts said.

In February, the one-month inter-bank rate (HIBOR) was lagging its dollar equivalent the most since January 2008, leading investors to borrow cheaply in the Hong Kong dollar to buy higher-yielding US dollar assets and spurring capital outflows.

That gap has since narrowed but stays at 2008 levels.



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