Hong Kong defends dollar peg for fifth day amid persistent inflows

[HONG KONG] Hong Kong's de facto central bank intervened for the fifth consecutive day as the local currency traded at the strong end of its trading band.

The Hong Kong Monetary Authority (HKMA) sold HK$3.72 billion (S$666.9 million) worth of local dollars on Wednesday, taking the total since it began intervening in April to HK$48.1 billion. Demand for the currency has increased as investors piled into Chinese shares sales. Netease jumped on its debut on Thursday, while JD.com is poised to raise HK$30.1 billion in its Hong Kong offering, according to people familiar with the matter.

Demand for Hong Kong dollars is likely to continue to remain strong, although for how long isn't clear. While local borrowing costs have come down, narrowing the currency's yield advantage over that in the US, the gap is still wide enough to make the carry trade attractive. The need to hold cash may weaken after JD.com's debut, which is slated for June 18, although upcoming dividend payments by local firms will add pressure on the currency to rise.

"The intervention will likely continue, as the Hong Kong dollar will remain strong on capital inflows," said Gao Qi, a currency strategist at Scotiabank in Singapore. "Also, the long carry trade will still be profitable with the current interest-rate differential."

The HKMA said on Thursday it will continue to monitor market developments, and maintain monetary and financial stability.

The currency's one-month borrowing costs were 60 basis points higher than those on the greenback as at Tuesday. The gap needs to drop to 20 basis points for the carry trade to lose appeal, according to OCBC Wing Hang Bank Ltd.

Liquidity is increasing, albeit slowly. The aggregate balance will rise to HK$122 billion, more than double its level in March and the highest since 2018. Previous interventions when the currency was at the weak end of the band had diminished the pool of liquidity in the city.

The currency's 12-month interest-rate swaps - an indicator of investors' bets on future borrowing costs - declined to 0.8 per cent, the lowest level since November 2016. Forward points on the city's dollars also dropped, reflecting looser liquidity in the foreign-exchange market.

The Hong Kong dollar traded at 7.7506 per greenback at 11.28am, close to its 7.75 limit.

BLOOMBERG