[HONG KONG] Hong Kong’s brief pause from defending its beleaguered currency proved to be short-lived, as the authorities were forced to buy local dollars for the third time in a week amid stock outflows and low local rates.
The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, bought HK$6.429 billion (S$1.1 billion) of the local currency on Tuesday (Aug 5), in addition to its purchases on Aug 1 and Jul 30. That is after being absent from the market for two weeks.
The resumption of currency intervention underscores the persistent pressure on the Hong Kong dollar as the city’s low rates keep the yield gap with the US wide, spurring traders to short the local currency in favour of the higher-yielding greenback.
Moreover, Chinese investors net sold the most amount of the city’s shares since May 12 on Monday, as per Bloomberg calculations, adding to headwinds for the local currency.
“Southbound equity outflows and an abating of seasonal demand may have left the selling Hong Kong dollar pressure dominant,” said Carie Li, global market strategist at DBS. “The wide yield differential will keep carry trades active, so more intervention is likely to come ahead.”
The HKMA has been intervening to cap the local dollar’s losses since June, as it deals with the repercussions of efforts earlier this year to restrain the currency’s strength. Its earlier sales of the Hong Kong dollar caused local rates to tumble versus those in the US, heaping pressure on the currency.
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The monetary authority withdrew a total of HK$13.89 billion of liquidity from the market in a week via its purchases of the local currency, according to Bloomberg calculations, to keep it boxed in a range of 7.75 to 7.85 per US dollar.
The one-month Hong Kong Interbank Offered Rate has risen from a three-year low touched in June to nearly 1 per cent as of Monday, but it is still down from more than 4 per cent level seen in April.
HKMA may not have been the sole monetary authority in Asia defending its currency on Tuesday. Rupee purchases by Indian state banks were also suggestive of central bank intervention, as the currency hovered near a record low after US President Donald Trump threatened to ramp up tariffs on the nation.
For Hong Kong’s authorities, the battle against depreciation is expected to be a prolonged one, as withdrawing cash too quickly would send local rates surging and hurt the already frail economy. However, rising expectations of Federal Reserve rate cuts, following last week’s shocking US jobs data, could provide some relief for the HKMA if the rate gap between the two economies narrows.
“The buying of US dollar/Hong Kong dollar is probably driven by the ongoing carry trade, which might not last long if markets were to price in more US rate cut following the the soft US job market last week,” said Chong Wee Khoon, senior Asia-Pacific market strategist at BNY in Hong Kong. BLOOMBERG
