HKMA intervenes to defend Hong Kong dollar peg as carry trades pressure trading band
Market intervention will squeeze liquidity in the banking system and likely lift local interest rates
The Hong Kong Monetary Authority (HKMA) intervened in the foreign exchange market for the second time in seven days as “mouth-watering” interest rate disparity fuelled carry trades and pushed the local dollar to the weak side of its trading band.
The authority sold US$2.55 billion during New York trading hours on Tuesday and bought the equivalent of HK$20.02 billion at HK$7.85 per US dollar, it said on Wednesday. The move would trim the aggregate balance – a measure of the banking sector’s liquidity – by the same amount to HK$144.2 billion on July 3, it added.
Hong Kong pegged its currency to the US dollar at HK$7.80 in 1983 and in 2005 allowed its value to swing within a narrow band of HK$7.75 to HK$7.85. The HKMA is obliged to intervene to protect the trading band under its commitment to the linked exchange rate system.
HKMA chief executive Eddie Yue Wai-man last week said the local dollar came under pressure as demand weakened because listed companies had completed their dividend payments and funds raised from initial public offerings were converted into other currencies for repatriation.
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Carry trade is a strategy that involves borrowing money in a currency with a low interest rate to invest in a currency with a higher interest rate. The overnight interbank rate in Hong Kong stood at 0.02 per cent, versus 4.3 per cent in the US. Local three-month bills yielded about 0.6 per cent on June 30, while US Treasury bills paid 4.2 per cent.