Hong Kong Dollar/Bloomberg
The Hong Kong Monetary Authority (HKMA) bought HKD 1.51 billion ($192 million) of local dollars during London and New York trading hours, a move which will reduce the aggregate balance, a measure of interbank liquidity, to a decade low of HKD 74.8 billion.
Monday 11, March 2019
(Bloomberg) --Hong Kong faces the likelihood of rising borrowing costs after the city’s central bank intervened to defend its currency peg for the first time since August.
While the size of the buying was small relative to some of the HKMA’s interventions last year, continued weakness in the currency may prompt the central bank to drain more liquidity. That would intensify pressure on home values in the world’s most expensive property market, and weigh on the city’s economy. Just 11 months ago the aggregate balance stood at about HKD180 billion.
So far, the government -- which spent years unsuccessfully trying to cool the housing market as the US held borrowing costs near zero -- appears sanguine about the prospect of tighter liquidity.
Howard Lee, the HKMA Deputy Chief Executive, said, “The outflow of funds from the Hong Kong dollar is an "inevitable process" as the monetary environment normalises.”
Lee said it would not be surprising if the Hong Kong dollar again weakened to the bottom of its trading band, and the HKMA stands ready to defend it.
Hong Kong effectively imports US monetary policy thanks to the currency peg, even if local rates do not always track those across the Pacific.
While last year’s interventions helped the one-month interbank rate, known as Hibor, climb to a decade-high of about 2.4 per cent in December, the cost of borrowing has tumbled recently. The one-month rate fell to as low as 0.91 per cent in February, compared with 2.49 per cent for US Libor. The gap makes it profitable to short the Hong Kong dollar, which has been near the weak end of its band for weeks.
Abundant liquidity in the currency market, weak demand for loans and a lack of large-scale initial public offerings in Hong Kong have contributed to the rate gap, Lee said.
More intervention is possible, though the security of the peg isn’t in doubt, said Bipan Rai, head of North American foreign-exchange strategy at Canadian Imperial Bank of Commerce.
“Reserve levels have been built up significantly over the past decade and the HKMA still has an ample amount of reserves to defend the USD/HKD range for now,” Rai said. “It’ll likely be tested a few times, which may see further intervention. But any talk of the peg giving way is an extreme long shot.”