Hong Kong Monetary Authority bought HK$51 billion during 13 interventions to stabilise currency against US dollar
Intervention within expectations, says deputy chief executive Howard Lee
The Hong Kong Monetary Authority, the city’s de facto central bank, in the past week has bought HK$51 billion of its own currency by selling US$6.54 billion worth of US dollars to defend the Hong Kong dollar, a move that its deputy chief executive said was in accordance with the linked exchange rate system.
“Since Thursday, when we triggered the weak end of the peg, we have intervened in the market a total of 13 times, buying HK$51 billion and selling the US dollar. This has reduced the banking aggregate balance within our expectations,” Howard Lee said in a media briefing on Thursday morning.
“Previously, when the strong end of the convertibility undertaking has been triggered, this too has led to situations of foreign exchange interventions. We have been monitoring the market behaviour and we realised operations have been smooth,” he said.
Lee also pointed to the absence of the large-scale shorting of the Hong Kong dollar.
“There are concerns if there are people who short the Hong Kong dollar. But when there is a situation providing arbitrage opportunities of interest rate differentials, then selling the Hong Kong dollar under because of this is expected, under the linked exchange rate system.”
“We don’t see large-scale sales of the Hong Kong dollar, and within our linked exchange rate system, there has been no sharp depreciation either,” said Lee.
“Analysts have shown the HKMA has kept confidence strong under the peg system. However, we will not be complacent and we will monitor the market every day to see if there is anything unusual taking place, which we will handle very carefully,” he said.
At the same time, there were reports of continuous Hong Kong dollar outflows and some brokers were worried the aggregate balance would fall to zero.
Lee, however, said that under the linked exchange rate system, whenever there is an outflow of Hong Kong dollars, the HKMA buys the local currency. This leads to the reduction of the aggregate balance and, hence, interest rates rise gradually.
“In a short space of time, we saw outflows worth HK$50 billion and we saw interbank rates gradually correcting higher. The overnight interest rates are already up 10 basis points from last year and the one month interest rates are up 12 basis points,” said Lee.
“We expect this situation will continue, but there is no concern if the aggregate balance falls sharply, whether rates will rise rapidly. Looking at the situation now, the HK$50 billion outflow – compared to the aggregate balance of HK$180 billion – is small. It is an acceptable level. We saw fund inflows of HK$1 trillion into Hong Kong’s banking system in the past few years, and this means by comparison the outflows remain a small proportion,” he added.
Lee said banks also hold large amounts of Exchange Fund bills worth about HK$1 trillion.
“If interbank funds are really tightened, banks are able to use these bills via our discount windows to obtain Hong Kong dollar liquidity. When it is so tight that it affects normal operations, we also have the option to redeem these bills to let funds flow back into the banking aggregate balance,” he said.
Lee said Hong Kong capital outflows will depend on market situations, such as the path of US interest rate increases and strong market demand from initial public offerings. It would be hard to be accurate to make such outflow predictions, he said.
If the aggregate balance were to fall below HK$100 billion, many bankers would see this as the threshold for banks to add their own interest rates, but Lee said the number had no special meaning. “More importantly, we need to make sure that our operations are in order, and our monitoring of the market continues, and we are vigilant,” he said.
“Other than watching the foreign exchange market, we will closely communicate with the Securities and Futures Commission about the stock or futures markets.”