Hong Kong Monetary Authority intervenes in currency market for first time since May
De facto central bank steps in to defend the Hong Kong dollar, as breaking point looms where city’s banks could feel pressure to raise home mortgage rates.
Hong Kong’s de facto central bank said it has stepped in the foreign currency market to defend the Hong Kong dollar for the first time since May, bringing a key property loan interest rate closer to a tipping point.
The Hong Kong Monetary Authority bought HK$2.159 billion and sold US$275 million as the Hong Kong dollar hit the 7.8500 per US dollar level, during New York trading hours at 5am Wednesday Hong Kong time, and bought a further HK$2.355 billion to sell US$300 million in Hong Kong on Wednesday afternoon.
The combined intervention is expected to withdraw banking liquidity, reducing the city’s aggregate balance to about HK$104.69 billion. Under its currency board system, the HKMA is obliged to keep the local currency within a trading range between 7.75 to 7.85 per dollar. The Hong Kong dollar remained at 7.8500 against the US dollar as of 5:30pm.
Depreciation pressure on the local currency was exacerbated in recent days as the Turkish lira crisis roiled equities and currency markets around the world, leading traders and investors to offload emerging market and Asian assets while buying the US dollar safe-haven assets.
The deteriorating sentiment could prompt further intervention by the monetary authority, and continue shrinking banking liquidity. The aggregate balance is currently down 40 per cent from HK$180 billion in April, when the HKMA first stepped in the market to support the local currency and started tightening the amount of dollars in circulation.
Many analysts believe that if the aggregate balance level falls below HK$100 billion, Hong Kong interest rates would become more sensitive. That would pressure commercial banks to raise their prime rates, leaving existing homeowners with higher mortgage payments. Most property loans in Hong Kong are linked to Hibor rates or to prime rates, which are set by banks.
In addition, the lenders, which have held prime rates steady over the past 10 years, could face pain in September, when the HKMA is expected to raise the benchmark interest rate in lockstep with the US Federal Reserve to maintain the city’s currency peg with the US dollar.
Deputy Chief of the HKMA Howard Lee Tat-chi said that demand for Hong Kong dollars had dropped in recent days because of an arbitrage trade where investors would buy the higher yielding US dollar currency and sell the lower-yielding local currency. Funds have also been leaving Hong Kong because of the completion of big initial public equity offerings, he said.
“If the Fed hikes [the benchmark] rate again in September, then the pressure on banks to raise their prime rates will intensify, and further intervention in the near term cannot be ruled out,” said Frances Cheung, head of macro strategy Asia at Westpac Banking Corp.
In the past week or so, about 15 of city’s lenders raised their mortgage rates for new borrowers by 10 basis points, equivalent to HK$50 more in monthly instalments for every HK$1 million borrowed.
The median housing price of Hong Kong’s property market had risen for 27 consecutive months in July, putting housing beyond the affordability of many first-time buyers and school leavers.
“We would like to remind everyone again to carefully manage interest rate and market risks,” HKMA’s Lee said.