HONG KONG/SHANGHAI (Reuters) -Hong Kong’s de facto central bank said on Thursday it bought US$1.2 billion worth of Hong Kong dollars after the local currency hit the weak end of its trading band.
The city’s currency is pegged in a narrow range of 7.75-7.85 to the greenback, and the Hong Kong Monetary Authority (HKMA) intervenes at both ends to underpin the peg.
HKMA’s intervention comes after the Hong Kong dollar hit the weak side of the band for the first time in two years last Friday.
“Depending on the direction of capital flows and the supply-demand conditions for the Hong Kong dollar, the weak-side Convertibility Undertaking (CU) may be triggered again in the future,” Eddie Yue, chief executive of the HKMA, said in a online statement.
“As the aggregate balance declines, Hong Kong dollar interbank rates may increase … The HKMA will continue to closely monitor market developments and the external environment to ensure the orderly operation of the Hong Kong dollar markets.”
The aggregate balance, the key gauge of cash in the banking system, will shrink by HK$9.42 billion on Friday, HKMA said in a separate statement.
If the Hong Kong dollar remains weak and triggers additional intervention by HKMA, local currency liquidity is likely to shrink further.
“This is encouraging carry trades to stay long USD/HKD, and it could take time for Hong Kong dollar liquidity conditions to normalise, with more Hong Kong dollar buying interventions needed to reduce the aggregate balance,” said Chang Wei Liang, strategist at DBS.
Hong Kong interbank rates rose across the board on Thursday following the HKMA move.
The Hong Kong dollar experienced sharp swings over May and June, as foreign and Chinese capital flocked to blockbuster share offerings or to pick up undervalued stocks in the Asian financial hub.
The resulting strength in the currency triggered by the inflows pressured the HKMA to sell Hong Kong dollars to protect the peg, flooding the banking system with cash and driving the local interest rates sharply lower.
The plunging domestic interbank rates spurred speculative positions that used Hong Kong dollar borrowings to bet on other markets.
Last week, HKMA said the outlook for the direction of the Hong Kong dollar and for interbank rates remains uncertain due to carry trades and other factors.
(Reporting by Summer Zhen and Jiaxing Li in Hong Kong and Samuel Shen in Shanghai; Editing by Christopher Cushing, Shri Navaratnam and Kate Mayberry)
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