HKMA sells US$5b of Exchange Fund Bills; says unrelated to currency slide

The HKMA says the bills to be issued between August 22 and September 19, were mainly to meet demand amid abundant liquidity

PUBLISHED : Wednesday, 09 August, 2017, 7:21pm
UPDATED : Friday, 26 January, 2018, 4:14pm

The Hong Kong Monetary Authority said it would sell HK$40 billion (US$5.11 billion) of Exchange Fund Bills, halting the Hong Kong dollar’s march toward a 10-year low.

The de facto central bank said the bills would be issued between August 22 and September 19 to satisfy strong demand from banks, given the abundance of liquidity in the financial system. The offer had nothing to do with the recent weakening of the Hong Kong dollar, which is not a concern to the HKMA, it said.

“Banks’ demand for such paper has been strong in recent months, mainly for liquidity management purposes. The HKMA considers the additional issuances appropriate amidst the current market environment,” the HKMA said, adding that the search for yield comes as banks’ liquidity coverage ratio will step up to 90 per cent in 2018 and 100 per cent in 2019, under the phase-in arrangement of the Basel liquidity requirements.

As a result of the HKMA’s Exchange Fund Bill issuance, Hong Kong’s aggregate balance, which represents the level of interbank liquidity, is projected to decline from the current HK$259.5 billion level to HK$219.5 billion in September.

The HKMA previously reduced the aggregate balance for a period from a peak of HK$426 billion in November 2015 to HK$259.5 billion in September 2016, but it has been held steady since.

“The HKMA’s Exchange Fund Bills issuance indicates its policy shift to smooth out the Hong Kong dollar’s depreciation pace,” Ken Cheung Kin-tai, Senior Asian FX strategist at Mizuho Bank said. “The wide HKD-USD rate spread would still guide the USD/HKD towards the 7.85 level in the medium term,” Cheung said.

The HKMA considers the additional issuances appropriate amidst the current market environment

The HKMA’s announcement triggered a sharp rebound in the Hong Kong dollar, which rose 0.09 per cent on Wednesday to HK$7.8159 per dollar, after touching an intra-day low of HK$7.8278. It however, remains down 0.75 per cent so far this year, and is the second worse performer among 11-most traded Asian currencies.

Investors sold the Hong Kong currency in exchange for US dollars in order to profit from the widened interest rate differential.

The Hong Kong currency has been weakening this year because flush liquidity parked with the city has been anchoring local rates, even as the Federal Reserve raised US interest rates three times since December last year.

Under the linked exchange rate system (LERS), the HKMA is obliged to prevent the currency from breaching either side of a trading band that ranges between 7.75 and 7.85.

“When it eventually weakens to 7.85 against the US dollar and triggers the Weak-side Convertibility Undertaking, there will be capital outflows, i.e. aggregate balance will reduce and Hong Kong dollar interest rates will then rise. The above is a natural process and is part of the design of the LERS. There is nothing that should be of concern,” the HKMA said.