Hong Kong Intervenes to Defend Currency Peg for First Time Since May

(Bloomberg) -- Hong Kong intervened for a second day to defend its currency’s peg to the dollar after it fell to the weak end of its trading band.

The Hong Kong Monetary Authority bought HK$2.355 billion ($300 million) of local dollars on Wednesday evening, according to the de facto central bank’s page on Bloomberg. That followed its purchase of HK$2.159 billion during New York trading hours Tuesday, its first intervention in three months. The city’s currency traded at HK$7.8500 as of 5:46 p.m. local time. The permitted trading range for Hong Kong dollar is HK$7.75-7.85 against the dollar.

The Turkey-induced turmoil in emerging markets has spurred risk aversion among investors and strengthened the greenback, putting the Hong Kong dollar under renewed pressure. Lower rates than the U.S. have also made the local currency an attractive target for shorting.

“Further intervention cannot be ruled out as Hong Kong dollar is trading very near HK$7.85 per dollar,” said Frances Cheung, Singapore-based head of Asia macro strategy at Westpac Banking Corp.

Hong Kong Intervenes to Defend Currency Peg for First Time Since May

The HKMA has spent around HK$75 billion this year protecting the currency system, which has the effect of tightening liquidity in a city that’s enjoyed ultra-low borrowing costs as it imports U.S. monetary policy. The aggregate balance of the banking system will drop to HK$104.89 billion Friday.

The city has the ability to cope with market volatility and the challenges of capital outflows, HKMA Deputy Chief Executive Howard Lee said in an emailed statement Wednesday.

One-year Hong Kong interbank rates gained by the most in a month after the monetary authority’s action Tuesday, according to fixing from Hong Kong Association of Banks. A Bloomberg replica of the dollar spot index is poised for the highest close since June 2017.

The intervention also came as Hong Kong unexpectedly posted a quarter-on-quarter economic contraction for the three months ended June on the back of rising local rates. Home loan rates had their biggest jump in five years after major lenders including HSBC Holdings Plc and BOC Hong Kong Holdings Ltd. lifted the cap for mortgages linked to local interbank rates on Aug. 13.

The Hong Kong dollar is likely to stay weak in the near term, inviting more intervention from the monetary authority, said Irene Cheung, a foreign-exchange strategist at Australia & New Zealand Banking Group. The city’s aggregate balance may drop below HK$100 billion in the short run, she said.

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