Hong Kong intervened six times in past week to rein in dollar as widening interest rate gap and return of IPOs draw hot money
- The aggregate balance in Hong Kong rose by nearly 57 per cent to HK$84.71 billion, according to data by the Hong Kong Monetary Authority
- Total deposits rose 0.2 per cent to HK$13.77 trillion (US$1.77 trillion) in March, compared with a 0.1 per cent decline in February, according to the HKMA’s monthly data
Hong Kong's monetary authority entered the foreign currency markets six times in the past week to rein in the city's strengthening currency, bringing it within a trading band against the US dollar as a widening interest rate gap and a return of initial public offerings attracted hot money to the local economy.
The interventions, plus a slack in the issuance of Exchange Fund bills, raised the aggregate balance – the indicator of liquidity in the financial system – by nearly 57 per cent to HK$84.71 billion (US$10.93 billion) , according to data by the Hong Kong Monetary Authority (HKMA).
The infusion of Hong Kong dollars helped to lower the cost of money, with one-month benchmark rate dropping to 1.15 per cent, providing temporary relief for mortgage borrowers and an estimated 340,000 small and medium-sized companies whose loans are priced on the Hong Kong interbank offered rate, or Hibor.
The pain point for banks “has always been liquidity, instead of pressure points like non-performing loans,” said Brett McGonegal, chief executive of consultancy firm Capital Link International. “Thus, any decrease in overnight bank to bank rates helps augment liquidity quell acute impacts which translates into healthier banks. This is all positive in the financial community.”
Capital began entering Hong Kong in March, after two emergency cuts in interest rates by the US Federal Reserve to prepare the American economy for the onslaught of the coronavirus pandemic. The move was matched in a smaller quantum by the HKMA, which typically sets its monetary policy in lockstep with the US to preserve the Hong Kong dollar’s peg against the US currency.
The gap between the one-month Hibor and the US Libor widened 113 points on March 31, from 53 points at the start of the year. The inflow pushed the Hong Kong dollar higher, rising 0.5 per cent in March from a month earlier in the local currency’s biggest monthly advance since September 2003.