Hong Kong’s monetary authority sells US dollars to prop up local currency, the first intervention since August 2018 as rate gap widened

The Hong Kong Monetary Authority said it sold US dollars equivalent to HK$1.5 billion to keep the local exchange rate at above HK$7.8500 per dollar

More interventions are likely if carry trade continues to take advantage of an interest rate gap between the local currency and US dollars, the HKMA said

2-MIN READ2-MIN

Money exchange of Hong Kong dollar to US dollar in Wan Chai, as of 9 March, 2018. Photo SCMP / Jonathan Wong

Published: 1:41pm, 9 Mar 2019Updated: 1:58pm, 9 Mar 2019

Hong Kong’s monetary authority has sold HK$1.5 billion (US$191 million) of US dollars in the foreign-exchange market to prop up the local currency’s value against the greenback, the first intervention by the city’s de facto cental bank since August 2018.

The move, undertaken through the “weak-side convertibility undertaking (CU),” was triggered when the local currency touched 7.8500 per dollar, the lower limit of a trading band in place since May 2005. The aggregate balance of Hong Kong’s currency reserve would fall by HK$1.5 billion to HK$74.802 billion after the intervention, the Hong Kong Monetary Authority (HKMA) said in a statement on Saturday.

The local currency weakened to touch the lower limit of the trading band because a decline in banks’ funding demand had led to a drop in interbank rates for Hong Kong dollars, which widened the gap between local-currency and US dollar deposit rates. The gap in overnight rates was between 150 and 200 basis points, while the difference in 1-month rates was at about 150 basis points.

“The wide interest rate gap attracted carry trade activities that sold HKD for USD, pushing the HKD towards the weak side,” said HKMA’s deuty chief executive Howard Lee.

“If the large gaps between the HKD and USD interest rates remain, carry trade activities will keep the HKD weak in the near future,” Lee said, making it very likely “for the weak-side CU to be triggered again.”

One-month Hibor (Hong Kong Interbank Offer Rate) since 1983. SCMP Graphics

Hong Kong’s monetary policy is run in lockstep with the US Federal Reserve to maintain the local currency’s peg against the US dollar. That means every interest rate move by the US central bank is matched in equal measure in Hong Kong.