HKMA mounts $1.5b defence as HKD hits top end of peg

Business | Bloomberg and Avery Chen 22 Apr 2020

The Hong Kong Monetary Authority sold the local dollar for the first time since 2015 after the currency rose to the strong end of its trading band, mainly driven by carry-trade activities as the higher local interest rates relative to the greenback have made the local currency more appealing.

The HKMA yesterday sold HK$1.55 billion to the market in exchange for US dollars. The Hong Kong dollar strengthened to its upper limit of 7.75 per greenback for the first time since 2016 yesterday. The local currency has jumped 0.5 percent this year, the best gain among 31 major global peers after the yen.

Eddie Yue Wai-man, chief executive of the HKMA, said the recent strength in the Hong Kong dollar is due to increases in carry-trade activities and equity-related demand for Hong Kong dollars. The increases in fiscal spending will also elevate the demand for Hong Kong dollars, he added.

Interventions to buy the local dollar in 2018 and 2019 helped shrink the aggregate balance in the city - an indicator of interbank cash supply - by 70 percent to HK$54 billion before yesterday. After HKMA's latest action, the aggregate balance will increase to HK$60.6 billion on April 23.

Continued sales by the authority would ease liquidity, which may reduce interest rates in the city. The one-month interbank borrowing costs in the currency, known as Hibor, rose to 1.589 percent yesterday, compared with 0.67 percent for Libor as of last week.

"The interest-rate gap between the Hong Kong dollar and the greenback will support the city's currency in the near term," said Ken Cheung, chief Asia foreign-exchange strategist at Mizuho Bank. He added the intervention will continue, but it would be gradual.

The Hong Kong dollar will likely stay close to 7.75 throughout the second quarter, said Stephen Chiu, a foreign-exchange and rates strategist at Bloomberg Intelligence. This means the HKMA could boost the aggregate balance by more than HK$100 billion through retiring some outstanding exchange-fund bills and notes as well as intervening at the strong end, he added.

There's unlikely to be any need for massive HKMA intervention because of limited foreign exchange inflows into local assets such as stocks, Carie Li, an economist at OCBC Wing Hang Bank said.

Meanwhile, the Hang Seng Index fell 536.47 points, or 2.2 percent, to 23,793.55 yesterday, as global stocks retreated amid the ongoing oil collapse.

Separately, the Securities and Futures Commission said it will continue to take all measures necessary to ensure that Hong Kong's markets remain fully open for business throughout the pandemic.

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