HKMA intervention set to exceed last year's

The Hong Kong Monetary Authority faces fresh fund inflows into local stocks that are likely to see its latest round of moves in the currency market surpass the last major intervention last year.

While the de facto central bank remains vigilant over gains in the local currency, the yuan yesterday saw its biggest fall in 13 months against the US dollar.

The Hong Kong dollar was trading between 7.7495 and 7.7501 to the greenback yesterday, despite the HKMA having injected HK$1.7 billion early on Saturday morning and HK$13.175 billion late on Friday afternoon. The HKMA has now intervened 12 times in the market in the 16 days since April 9, for a total of HK$71.49 billion. Bankers expect this month's round of interventions will soon exceed the response in July and August last year, when the HKMA spent HK$75.3 billion to defend the peg amid fund inflows driven by the impending launch of the stock through scheme and Russian inflows during unrest in Ukraine.

"The Hong Kong dollar is set to remain strong as it linked to the US dollar, which is strong against other currencies. Also, the stock market momentum remains strong and investors will need Hong Kong dollars to trade," said Wilson Chan Fung-cheung, senior consultant of the Hong Kong Institute of Bankers.

Chan said the current intervention is on track to eclipse the HK$100 billion spent from October to December 2012. "I would not be surprised if the intervention amount would even break the historical high of HK$600 billion from September 2008 to December 2009 when the US monetary easing policy led to substantial capital inflows," he said.

Under the peg to the US dollar, the HKMA needs to intervene when it touches the top end of its trading range at 7.75, by buying the US dollar and selling the Hong Kong dollar to weaken the currency. The sustained stock market rally that started after the Easter break on April 8 has spurred strong fund inflows from mainland and global investors. They need to swap the yuan or other currencies into HK dollars.

In contrast to the upward pressures on the Hong Kong dollar, the onshore yuan yesterday closed at a one-month low of 6.2206 against the US dollar, down 0.4 per cent from the previous close. The offshore yuan last night was trading at 6.2200.

"Client dollar demand has remained strong most of this year, while major state-owned banks are suspected to have supplied liquidity on behalf of the central bank," a dealer at a European bank in Shanghai was quoted by Reuters as saying.

Despite the yuan's fall yesterday, Chan said: "The yuan will be trading strongly against other major currencies but would be stable with the US dollar. This is because the many reforms in China and infrastructure projects would have strong demand on the yuan to support its value."