Hong Kong Monetary Authority (HKMA)
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The HKMA, the city’s de facto central bank, has intervened in the market 15 times this year to defend the Hong Kong dollar’s peg to the US dollar. Photo: Shutterstock

Hong Kong makes second intervention in 24 hours to defend local currency peg as Fed rate policy threatens more capital flight

  • The monetary authority on Friday bought HK$5.32 billion and sold US$678 million to keep the local dollar within its trading band
  • The latest intervention takes total purchases to HK$122.395 billion and total sales to US$15.59 billion

The Hong Kong Monetary Authority (HKMA) intervened in the foreign-exchange market twice within 24 hours to defend the local currency peg as the market braced for more capital flight ahead of potentially US rate rise in four decades at the end of the month.

The authority on Friday morning bought HK$5.32 billion and sold US$678 million, according to a statement. It bought HK$12.796 billion and sold US$1.6 billion on Thursday to support the peg after the local currency hit the weaker end of its HK$7.75 to HK$7.85 band. The two moves came after a three-week pause.

The HKMA, the city’s de facto central bank, has stepped into the market 16 times this year, buying a total of HK$122.395 billion and selling US$15.59 billion amid persistent capital outflows. This has now surpassed the size of its recent intervention, for different reasons: HK$103.48 billion in 2018 and HK$22.13 billion in 2019.

“US interest-rate futures show that the market now widely expects that the Federal Reserve will have a full percentage-point rate rise at the coming meeting on July 26 and 27,” said Jasper Lo, an independent forex analyst. US consumer prices rose 9.1 per cent in June from a year earlier, a four-decade high.

A security guard points to ‘no photo’ sign outside the Hong Kong Monetary Authority (HKMA) at International Financial Centre in Hong Kong’s Central district in June 11, 2020. Photo: SCMP / Nora Tam

A one-percentage point rate rise will be the most aggressive since August 1983, when the Fed lifted its key rate by 1.12 percentage points.

“The expected aggressive rate rise has led to capital flowing out of the Hong Kong dollar and into the US dollar to enjoy the higher yield,” Lo said. “We can expect the HKMA will need to intervene more over the next two weeks to defend the peg.”

The local currency has been pegged to the US dollar at HK$7.80 since 1983. The HKMA is obliged to keep the local dollar trading within the trading band, and intervenes whenever the value veers out of that range.

The HKMA has also raised its base rate in lockstep with the Federal Reserve’s moves. However, commercial banks in the city have so far refrained from raising their rates for loans to their customers, with the interbank rate in Hong Kong rising at a slower pace than its US counterpart.

Financial Secretary Paul Chan Mo-po last month warned that the US rate increases would lead to more capital leaving Hong Kong’s financial markets.

How the Exchange Fund has protected Hong Kong dollar peg, fought off Soros

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$215.439 billion on July 18, compared with HK$337.53 billion before the first intervention this year on May 11.

Lo believes that commercial banks will only increase their prime lending rates when the aggregate balance drops to HK$150 billion.

The HKMA base rate now stands at 2 per cent, returning it to the level in March 2020 when the Covid-19 pandemic forced global central banks into drastic rate cuts to ­pre-empt a recession.

Lo believes the base rate will rise to about 4 per cent at the end of this year, much faster than an earlier expectation of the end of 2023. “The Fed has already sped up the pace of interest-rate rises, and we will see the local interest rate also increase at a faster pace as a result,” he said. “This will add pressure to the property market.”