Hong Kong defends currency peg for second day as stocks jump

[HONG KONG] Hong Kong's de facto central bank stepped in for a second day to prevent the currency from rising against the US dollar as demand surged for the city's stocks.

The Hong Kong Monetary Authority bought US$1.7 billion during the Hong Kong day on Friday at HK$7.75 a dollar, the upper limit of a convertibility range that triggers intervention. It bought an additional US$1.46 billion during New York hours. On Thursday, it had added US$400 million, in the first injection since August 2014.

Hong Kong's 32-year-old peg came under pressure as the city's benchmark Hang Seng Index jumped 7.9 per cent this week, the biggest advance since 2011. Chinese investors twice used up their daily quota for purchasing Hong Kong equities this week through an exchange link.

"The HKMA will likely need to continue its intervention," Koon How Heng, a Singapore-based foreign-exchange strategist at Credit Suisse Private Banking & Wealth Management, wrote in a note on Friday. "Given the strong influx of southbound funds, the Hong Kong dollar may well be pinned down at 7.75 in the weeks to come."

The Hong Kong dollar was little changed at HK$7.75 versus the greenback as of 5:47 pm in Hong Kong on Friday, according to data complied by Bloomberg. The currency on Wednesday touched HK$7.75 for the first time since January.

Chinese investors bought 10.5 billion yuan (US$1.7 billion) of Hong Kong shares - the maximum allowed - on both Wednesday and Thursday. They acted after the Chinese regulators late last month announced that more fund managers could buy equities listed in the city.

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

The Hong Kong Monetary Authority injected a total of US$9.7 billion into the financial system to defend the peg in July and August last year, according to data compiled by Bloomberg.

BLOOMBERG