Hong Kong Dollar Defense Tops $1.7 Billion, Currency Stays Weak

(Bloomberg) -- The Hong Kong dollar remains stuck at the weak end of its currency band, even after the monetary authority plowed $1.7 billion into defending the peg.

The city’s dollar traded at HK$7.8499 per greenback at 5:31 p.m. local time, near the level that can spur buying by the de facto central bank. The Hong Kong Monetary Authority has spent HK$13.3 billion ($1.7 billion) mopping up local dollars since the weak end of the band was reached on Thursday for the first time since 2005. The speed of intervention shows outflows are bigger than people had thought, according to China Everbright Bank Co.

“The pace of HKMA’s buying is a bit faster than we expected,” said Ngan Kim Man, deputy head of treasury at China Everbright Bank’s Hong Kong branch. Outflows are likely to accelerate as the U.S. further tightens monetary policy, which will finally boost short-end rates in Hong Kong, Ngan said.

Hong Kong Dollar Defense Tops $1.7 Billion, Currency Stays Weak

Hong Kong interbank rates have lagged behind their U.S. counterparts thanks to an abundance of liquidity -- something HKMA tightening may change. The aggregate balance of the city’s interbank cash supply will fall to HK$167 billion on Wednesday from the pre-intervention level of about HK$180 billion, according to the de facto central bank. One-month Hibor, as the local rate is known, stands at 0.85 percent, about 1 percentage point less than similar maturity Libor.

Hong Kong residents “shouldn’t expect that the environment of super low interest rates will persist forever,” Paul Chan, the city’s financial secretary, wrote in a blog Sunday. Investors “have to consider the possibility of a rise in the borrowing costs, and the impacts of higher interest rates on asset prices and their investments.”

The government has the capability of dealing with large capital outflows, and investors shouldn’t be too worried, Chan said. But the derivatives market is flashing signs of higher rates, with the Hong Kong dollar’s one-year interest rate swaps spiking 12 basis points, the most since December 2016, to 1.89 percent on Monday. That’s the highest since 2008, and suggests traders are pricing in higher borrowing costs. Also, analysts are flagging risks to the city’s home prices, which are among the least affordable in the world.

“If the downward pressure on the Hong Kong dollar persists, policy makers are likely to step up its intervention over the coming months,” Chang Liu, China economist at Capital Economics, wrote in a note dated Friday. “A bigger concern is that the rise in market interest rates precipitates a collapse in the property market, which causes wider problem in the economy, including a slump in consumption and a sharp rise in non-performing loans.”

Concern over intervention weighed on the city’s stock market, as the benchmark Hang Seng Index slid 1.6 percent Monday.

©2018 Bloomberg L.P.