Hong Kong moves to defend FX peg for third time in a week
The Hong Kong Monetary Authority (HKMA), 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 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 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.'
The latest intervention prompted the Hong Kong dollar to rebound to 7.8458 per US dollar in early Friday trading, marking its strongest level since Jun 6, before paring its gains.
The HKMA maintains the local currency in a trading range of HK$7.75 to HK$7.85 against the US dollar. Its recent travails are a consequence of the increasing debate over the world's reserve currency as US President Donald Trump's fiscal and trade agenda erode its strength. The greenback posted its worst first half of any year since 1973, with the US dollar Index down almost 11 per cent.
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The benchmark one-month Hong Kong Interbank Offered Rate, or Hibor, rose to 0.86 per cent on Friday, the highest in about a week. Because of the HKMA's interventions, the funding cost had swung between a high of over 4 per cent in late April and a three-year low of 0.52 per cent in mid June.
It's now nearly 350 basis points below the comparable US dollar funding rate.
The HKMA's three recent rounds of currency defence has cost it a total of HK$59 billion (US$7.5 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 HKMA will keep buying the Hong Kong 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.' BLOOMBERG
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