Hong Kong’s Currency Peg Defense Increases to $560 Million

(Bloomberg) -- Hong Kong’s de-facto central bank intervened once again to defend its currency peg as the local dollar touched the strong end of its trading band.

The Hong Kong Monetary Authority sold HK$2.79 billion ($360 million) of the city’s currency in the early hours of Wednesday local time, according to its page on Bloomberg, after sales of HK$1.55 billion late Tuesday. The aggregate balance, a measure of interbank liquidity, will increase to HK$63.4 billion.

Higher local interest rates relative to the greenback have made buying the Hong Kong dollar an appealing trade in recent weeks, despite the dire economic pressures the city is facing. It’s the first time since October 2015 that the HKMA has defended the peg at the strong end.

Gains in the local currency have been “mainly driven by increases in market carry-trade activities and equity-related demand,” said HKMA Chief Executive Eddie Yue in a statement Tuesday, adding that higher fiscal spending will also boost demand for Hong Kong dollars.

The Hong Kong dollar was little changed at 7.7501 per greenback as of 1:35 p.m. local time. The local currency has jumped 0.5% this year, the best gain among 31 major global exchange rates after the yen.

Continued sales by the authority would ease liquidity, which may reduce interest rates in the city. The one-month interbank borrowing costs in the currency, known as Hibor, was at 1.55% on Wednesday, compared with 0.67% for Libor as of Monday.

“The interest-rate gap between the Hong Kong dollar and the greenback will support the city’s currency in the near term,” said Ken Cheung, chief Asia foreign-exchange strategist at Mizuho Bank Ltd. “The intervention will continue, but it will be gradual.”

Hong Kong’s economy could do with all the help it can get. Business are reeling from the double blow of anti-government protests last year and the ongoing coronavirus pandemic. The jobless rate has climbed to the highest level since 2010 while retail sales plummeted 44% in February. The government recently announced a HK$140 billion spending package to stimulate growth.

Fitch Ratings on Monday downgraded Hong Kong’s long-term, foreign currency debt to AA- from AA, predicting real gross domestic product to fall 5% this year after a 1.2% decline in 2019.

Liquidity in the former British colony was tightened by a series of currency interventions in the past two years when lower borrowing costs relative to the U.S. helped drive the currency to the weak end of its trading band. That helped shrink the aggregate balance by 70% to HK$54 billion before the current Hong Kong dollar sales.

The currency will likely stay close to HK$7.75 throughout the second quarter, said Stephen Chiu, a foreign-exchange and rates strategist at Bloomberg Intelligence. This means the city’s de facto central bank may boost the aggregate balance by more than HK$100 billion through retiring some outstanding exchange-fund bills and notes and intervening at the strong end, he added.

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