The Hong Kong Monetary Authority stepped into the foreign exchange market for a third day on Monday, bringing its purchases of Hong Kong dollars and total sales of US dollars to HK$13.26 billion (US$1.69 billion) amid a persistently weak local currency.
The de facto central bank spent HK$3.597 billion on Monday absorbing local currency funds to defend the Hong Kong dollar’s weak end of its trading band at 7.8500 against the greenback.
The HKMA’s intervention to absorb funds from the banking system signal a path to higher interest rates for the city, helping close the Hong Kong-US interest rate gap and end arbitrage trades that cause outflows from the city, analysts said.
“The size of Hong Kong dollar purchases by the HKMA suggests increasing selling pressure by investors as they scramble for the last chance to take advantage of the US -China rate differentials,” said Jasper Lo Cho-yan, senior vice-president at iBest Finance.
Foreign exchange traders have been actively selling Hong Kong dollars and buying the US currency in an arbitrage called the carry trade, which sells a low-yielding asset to buy another with higher returns, as they take advantage of the price difference between their borrowing costs.
The Hong Kong dollar continued to change hands at 7.8500 as of 7pm on Monday.
Hong Kong interest rates are detached from US rates because of massive liquidity parked in the city, especially under the Fed’s quantitative easing and yuan depreciation fears in 2015.