Hong Kong buys US$800m to keep the city's currency pegged

[HONG KONG] Hong Kong's de facto central bank stepped in for the first time in more than four months to prevent the city's currency from breaking out of the strong end of its pegged range against the US dollar.

The Hong Kong Monetary Authority said it bought US$800 million on Tuesday at HK$7.75 a dollar, the upper limit of a band that triggers intervention. It last intervened in April, buying US$9.2 billion in total during the month. The HKMA "will monitor the market developments closely and maintain the stability of the Hong Kong dollar," it said in a statement.

Hong Kong's dollar is drawing funds as last month's surprise yuan devaluation and the prospect of higher US interest rates push currencies lower across Asia's developing economies. The weakening of the yuan was followed by exchange- rate shifts in Kazakhstan and Vietnam, making investors nervous about regime changes in other currencies.

"The demand for Hong Kong dollars comes from the unwinding of yuan after the devaluation," said Raymond Yeung, a senior economist at Australia & New Zealand Banking Group Ltd in Hong Kong. "It also reflects demand for safe-haven assets as Hong Kong's dollar is pegged to the US dollar. We aren't seeing a huge amount of speculation on changes in the peg."

The Hong Kong dollar traded at HK$7.75 as of 4:15 pm local time, according to data compiled by Bloomberg. Its one- year implied volatility, a gauge of expected price swings used to price options, rose five basis points to 2.12 per cent. That compares with a decade-high 3.20 per cent reached last week that was more than triple the level before China's Aug 11 devaluation.

The city linked its currency to the US dollar in 1983, when negotiations between China and the UK over Hong Kong's return to Chinese rule spurred an exodus of capital. In 2005, policy makers committed to limiting the currency's decline to HK$7.85 against the greenback and capping gains at HK$7.75.

BLOOMBERG