Hong Kong moves to defend FX peg for third time in a week
The HKMA maintains the local currency in a trading range of HK$7.75 to HK$7.85 against the US dollar
[HONG KONG] Hong Kong authorities intervened for the third time in a week to support the currency, which had dropped towards the weak end of its official trading band as the city’s interest rates touched a three-year low.
The Hong Kong Monetary Authority, the Chinese financial hub’s de-facto central bank, bought HK$29.6 billion (S$4.8 billion) of the currency in New York trading on Thursday (Jul 4). The amount was higher than the HK$20 billion it purchased earlier this week and more than triple the HK$9.4 billion bought last week.
The HKMA is dealing with the repercussions of its earlier efforts to restrain the currency, when it had rallied along with peers against the US dollar. Those interventions flooded money markets, ultimately putting pressure on the Hong Kong US dollar as local rates tumbled versus those available in the US. The monetary authority is now seeking to address that by withdrawing liquidity from the financial system.
The HKMA will keep buying the Hong Kong US dollar to ensure its exchange rate stays within the convertibility range, according to Chi Lo, a strategist at BNP Paribas Asset Management. “If needed and given its large war chest of FX reserves, the HKMA can sustain its action for a long time.”
The HKMA maintains the local currency in a trading range of HK$7.75 to HK$7.85 against the US dollar. And to achieve that, the de-facto central bank absorbs flows by taking the opposite side of trades once they reach either end of the band.
That intervention automatically results in either a withdrawal of liquidity from the market, if the HKMA is buying Hong Kong US dollars to support the currency, or an addition of liquidity if it’s aiming to prevent gains. The changes in liquidity, in turn, have a knock-on impact on lending rates in the economy.
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While the latest intervention prompted the Hong Kong US dollar to rebound to a one-month high of 7.8458 during early trading in Asia, the currency quickly pared gains to hover near the weak end again in the afternoon.
The currency is little changed at 7.8498 as of 5 pm local time.
As a result of the HKMA’s liquidity drainage, the benchmark one-month Hong Kong Interbank Offered Rate – or Hibor – rose to 0.86 per cent, the highest in about a week. However, it’s still some 350 basis points below the comparable US dollar funding rate, meaning short-Hong Kong US dollar bets are profitable and the currency is under pressure to weaken.
The HKMA’s three recent rounds of currency defence has cost it a total of HK$59 billion, according to Bloomberg’s calculations of official data. Hong Kong’s aggregate balance – a component of its monetary base – will fall to HK$114.5 billion as a result, down 34 per cent from the level before the series of intervention began in late June.
“The HKMA purchased the local US dollar for the third time in the past week to defend the peg, and the messaging from the options complex is that FX traders see USD/HKD moving back towards the centre of the official range before long,” said Mark Cranfield, Markets Live strategist, Singapore.
“The size of the overnight intervention exceeds market expectations,” said Kiyong Seong, a macro strategist at Societe Generale “If the HKMA drains liquidity quickly to decrease aggregate balance below HK$100 billion in the coming days, there may be some significant impact on Hibor.” BLOOMBERG
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