Hong Kong’s monetary authority steps in for the second time in a week to prop up the local dollar as interest rate gap widens
- The city’s de facto central bank spent HK$3.925 billion (US$500 million) in its latest outing to buy the Hong Kong dollar and keep it within the limits of a trading band
- A key driver for the deterioration of the local currency is a widening gap between Hong Kong dollars and the US dollar, caused by ample liquidity and lacklustre loans demand in the city’s banking system
Hong Kong’s de facto central bank has stepped into the foreign exchange market for the second time in a week, spending HK$3.925 billion (US$500 million) in its latest outing to prop up the local currency and keep it within the limits of a trading band with the US dollar.
The local currency changed hands on Wednesday morning at 7.8498 per dollar, hovering near the 7.8500 lower limit of a trading band introduced in 2005. The interventions this week will reduce the city’s aggregate balance of banking liquidity to US$70.9 billion on March 14.
The Hong Kong Monetary Authority (HKMA), which runs its interest rate policy in lockstep with the US Federal Reserve to maintain the city’s currency peg, is obliged to step in to buy or sell US dollars to keep the local dollar within the trading band. The upper limit of the band was set at 7.7500 per dollar in 2005.
That means every interest rate move by the US central bank is matched in equal measure in Hong Kong. However, the interbank rate for Hong Kong dollars has risen at a slower pace than for US dollars, as slowing demand for loans in the city – caused by a cooling property market and lacklustre investments amid the US-China trade war – have left banks flushed with liquidity, keeping the cost of money low.
Capital flowing into the Hong Kong stock market through the city’s Connect cross-border investment channel – the so-called Southbound funds coming from mainland China – is also maintaining ample liquidity in the city’s banks, said Wing Hang Bank’s economist Carie Li.
And if the large HKD-USD interest rate gap persists, then carry trade activities conducted by traders and investors is likely to keep the Hong Kong dollar weak in the future, Lee said.