Hong Kong dollar falls most in 22 months as HKMA says it won’t defend drop to lower end of the peg

The Hong Kong dollar plunged the most in 22 months after the city’s de facto central bank said it will not seek extra exchange fund bills and that it would let the currency fall to the weak end of the currency peg.

Bloomberg reported Hong Kong Monetary Authority (HKMA) chief executive Norman Chan Tak-lam as saying on Thursday that the authority had no plans to sell additional debt as the demand for exchange fund bills was largely met.

Since August, the HKMA had been selling exchange fund bills to absorb excessive liquidity in the financial system. As a result, one-month Hibor, a gauge of funding levels in the interbank market, climbed about 67 basis points to its current level of 1.09 per cent, which in turn narrowed the gap with US rates.

Earlier this year, the gap between Hong Kong and US interbank rates was larger, which attracted a popular “carry trade” in the market – when speculators continued selling Hong Kong dollars at a relatively low interest rate and used the funds to purchase higher US yielding assets, which caused the local currency to slide towards a 10-year low.

But the HKMA’s decision Thursday appears to deny such market expectations and may suggest that it does not want to tighten liquidity conditions too aggressively, and is avoiding excessively rapid increases in interbank rates, analysts said.