Hong Kong and Singapore step into currency markets
Hong Kong has begun buying its currency in a rare move that will increase interest rates and add to pressure on its property market, while Singapore has also tightened its monetary policy for the first time in six years.
The Hong Kong Monetary Authority (HKMA) intervened on Thursday and Friday to prop up the Hong Kong dollar after it fell to HK$7.85, its lowest level since 2005. Hong Kong’s de facto central bank used its reserves to sell a total of US$415 million and buy HK$3.26 billion.
Currency management in the region was not solely confined to the HKMA as the Monetary Authority of Singapore ( MAS) increased “slightly” the slope of its currency band from zero percent. The action was in response to upward pressure on inflation, which the MAS expects to persist over the longer term as a result of the “improving” labor market. The Singapore dollar was trading at S$1.3114 against the US dollar in early afternoon on Friday.
The monetary authorities’ move comes as trade tensions between and US and China have escalated, leading analysts to speculate whether such action might have to be unwound at some point.
The MAS acknowledged that risk and said it took into account the “uncertainty in macroeconomic outcomes presented by ongoing trade tension,” adding that it would “continue to closely monitor economic developments.” The MAS does not disclose the parameters of its currency band, and raising the “slope” is aimed at boosting the pace of the Singapore dollar’s appreciation.
Sue Trinh, head of Asia forex strategy at RBC Capital Markets, said: “If the trade war turns nasty, the MAS may find itself quickly reversing its modest tightening stance.”
She said a weaker local currency for Hong Kong is “appropriate” as a way to support exports, given the escalating trade tensions and Hong Kong’s dependence on the
Chinese economy. Hong Kong is the fourth most exposed economy to rising US protectionism targeting China, she pointed out.
With the Hong Kong dollar trading at HK$7.8499 late on Friday afternoon in Asia, analysts expect further action from the HKMA in the coming weeks.
Ronald Man, a strategist at Bank of America Merrill Lynch, said the HKMA could buy about HK$80bn (US$10 billion) in the coming weeks, to help stabilize interest rates and the currency.
But an increase in interest rates could pressure borrowers in Hong Kong, with potential repercussions for the property market. Recent weakness in the currency partly reflects the divergence in interest rates between Hong Kong and the US as the Federal Reserve continues to steadily raise borrowing costs.
Howard Lee, deputy chief executive of the HKMA, said that while property prices depend on many factors, he acknowledged that mortgage repayments would increase, so borrowers must “manage their interest rate expenses carefully.”
Hong Kong is the world’s least affordable housing market, according to the latest Annual Demographia International Housing Affordability survey. House prices have increased 146 per cent over the past decade, according to brokerage CLSA.
Chang Liu, an economist at Capital Economics, said recently that the “prospect of a property downturn” in Hong Kong, triggered by monetary tightening in the US and an increase in rates “has long been the biggest risk hanging over Hong Kong’s economy.”
However, Max Lin, an emerging markets strategist at NatWest Markets, said the amount bought by the HKMA only represents about 1.8% of the excess liquidity in Hong Kong. “The withdrawal of liquidity will be gradual, so the immediate impact on the property market will probably be muted.”
The HKMA is mandated to intervene and support the Hong Kong dollar in certain scenarios, such as when the currency breaches the weak end of its trading band of HK$7.75-HK$7.85 against the US dollar.
The latest intervention — the first since the trading range was set in 2005 — came in response to requests from banks, in Hong Kong and globally, who were unwilling to buy Hong Kong dollars at the HK$7.85 level.