HKMA intervenes to defend Hong Kong dollar peg, taking currency purchases beyond HK$100 billion amid capital flight
- The HKMA has bought HK$104.28 billion and sold US$13.28 billion in 14 interventions since May, surpassing the previous annual interventions in 2018 and 2019
- Widening yield gap has stoked capital flight from Hong Kong as commercial banks in the city refrained from raising their rates
The authority bought HK$8.58 billion and sold US$1.09 billion on Thursday morning to support the peg after the local currency hit the weaker end of HK$7.85 per dollar amid concerns about a widening interest-rate gap, according to a statement by the de facto central bank.
Including the five moves, the HKMA has intervened 14 times this year by buying a total of HK$104.28 billion of local currency and selling US$13.28 billion of US currency. This has surpassed the purchases in 2018 of HK$103.48 billion, and HK$22.13 billion in 2019 – the most recent bouts of capital outflows.
The monetary authority is obliged to keep the local dollar within the HK$7.75 to HK$7.85 band under its linked exchange rate system. The HKMA also raised its base rate in lockstep under the system, while commercial banks in the city have so far refrained from raising their lending rates.
The widening rate-gap has induced capital flight from Hong Kong as investors searched for higher yielding assets elsewhere, weakening the local currency. Hong Kong pegged its currency at HK$7.80 per dollar in 1983 and later introduced the trading band in 2005.
That liquidity, however, is depleting. The latest rounds of intervention will reduce the aggregate balance – the sum of balances in clearing accounts maintained by banks with the monetary authority – to HK$233.308 billion on June 24, compared with HK$337.53 billion before the first intervention this year on May 11.
Local interbank rates (Hibor) have risen. The one-month rate reached 0.7 per cent on Wednesday versus 0.14 per cent at the start of the year, while the three-month rate jumped to a fresh two-year high of 1.48 per cent versus 0.25 per cent in January. The 12-month Hibor climbed to a three-year high of 3.18 per cent versus 0.43 per cent in January.
The HKMA increased the base rate by 75 basis points last week to 2 per cent, a move that returned the benchmark to its March 2020 level, when the Covid-19 pandemic forced central banks into drastic rate cuts to pre-empt a global recession.
The base rate will rise to about 4 per cent by the end of 2023, if the HKMA tracks the 10-step lift-off in the US that could drive the Fed target rate to a 15-year high of 3.75 per cent.
Hong Kong’s stock market shrugged aside the spectre of a weaker dollar, with the benchmark Hang Seng Index rising by 1.3 per cent for the fourth day of gains in five trading days. The Hang Seng China Enterprises Index rose 1.8 per cent.