Hong Kong Is Still Blowing Billions To Defend Its Currency Peg

It has now been 28 days since the Hong Kong Dollar tumbled to the lower limit of its currency peg band and HKMA is still blowing billions every day to defend the currency…

So far HKMA has spent over US$8 billion buying Hong Kong Dollars and achieved nothing

Having briefly achieved some lift of the pressure in mid-April, HKMA’s intervention has begun again this week…

The Hong Kong Monetary Authority bought HK$1.963b to support the local currency overnight, according to the de facto central bank’s page on Bloomberg, decreasing its aggregate balance to HK$115.47 billion (US$14 billion).

As Bloomberg points out, the HKMA’s actions have the effect of tightening liquidity in a city that’s grown fat on ultra-low borrowing costs.

“The HKMA may need to mop up more liquidity and push the aggregate balance toward HK$100 billion this week,” said Carie Li, a Hong Kong-based economist at OCBC Wing Hang Bank Ltd.

“But the Hong Kong dollar will rebound starting next week, as funding needs to increase at month-end. Liquidity will tighten further in June due to an expected interest rate hike in the U.S. and potential funding demand fueled by Xiaomi and China Tower IPOs.”

Li said Hong Kong lenders will lift deposit rates as liquidity conditions tighten.

“Banks are likely to increase the prime rate around mid-year, which will hurt property market sentiment, especially for mortgage borrowers. The home market may see a correction and slower growth this year.”

And sure enough, as Bloomberg reports, rising short-term funding costs (3-month borrowing rate is 1.75% – near the highest since December 2008 – and up from 0.8% a year ago) have prompted banks to offer deposit rates of as much as 3%.

For now, the rising HKD Hibor is undoing some of the huge positive carry trade, but as the chart below shows, that carry advantage is still pressuring HKD…

In other words, rates will have to go higher and liquidity tighter before HKD really lifts off the lower peg band limit.

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