HKMA digs deep in fight for the dollar
Authority steps in for second day at cost of HK$8.5b amid capital outflows
Hong Kong’s de facto central bank stepped into the currency market again yesterday morning as it sought to defend the local dollar against the weakening effects of capital outflows.
It was the third intervention in two days by the Hong Kong Monetary Authority (HKMA), bringing its total support for the currency to US$1.08 billion. The local dollar had fallen to its weakest level in more than three years.
The HKMA bought HK$2.87 billion in the morning to bolster the exchange rate and return the currency to its trading band after it briefly fell to HK$7.85 per US dollar.
The band, in place since 2005, allows the Hong Kong dollar to fluctuate between HK$7.75 and HK$7.85 against the US dollar.
The authority bought HK$8.53 billion and sold US$1.08 billion in the three interventions, the first such action in 18 months.
“The weakening Hong Kong dollar came as a result of capital outflows as the rising US interest rates recently led traders to sell Hong Kong dollars and buy US dollars to enjoy a higher interest rate,” said Robert Lee Wai-wang, the lawmaker for the financial services sector and chief executive of Grand Capital Holdings.
“The stock market downturn and the slump in initial public offerings in the first quarter also meant fewer overseas investors injecting capital into Hong Kong.
“The weak Hong Kong dollar is likely to continue, which will force the authority to keep intervening in the currency market in the coming months.”
The interventions will reduce the aggregate balance – the sum of balances in clearing accounts maintained by banks with the HKMA – to HK$329.06 billion on May 16, according to data provided by the authority.
The HK$4.5 trillion Exchange Fund is one of the world’s largest financial war chests to protect the local currency, which has been pegged to the US dollar since 1983.
In past decades, the HKMA has used the fund to buy or sell Hong Kong dollars to ensure the currency is within the trading band. It also used HK$118 billion from the fund to buy shares in 1998 to fight an attack by shortsellers on the local currency.
“The recent capital outflows are normal carry trades in response to a widening interest rate gap between Hong Kong and the United States. There is no sign of short-sellers trying to attack the peg,” Lee said.
The capital outflows and the resulting interventions will drive interest rates up. The threemonth Hong Kong interbank offered rate could reach 2 per cent by the end of this year, up from 0.83 per cent yesterday, according to Ryan Lam, head of research of Shanghai Commercial Bank.
In a note after the HKMA intervention, Lam said the rate rise “will certainly take some steam out of the economy, but hardly be the end of the world”.
The HKMA’s most recent intervention came in October 2020 when it stepped into the market 85 times during the year, selling HK$383.5 billion of Hong Kong dollars to weaken the currency as a flood of global capital chased higher yields in the city amid low global interest rates.
The tide has since turned after the Federal Reserve ended its era of low interest rates to temper inflationary pressure in the US economy.
The US monetary authority flagged 10 increases in interest rates up to the end of next year, which has forced the HKMA to raise its rate in lockstep to maintain the city’s currency peg.
The capital outflows are normal ... There is no sign of shortsellers trying to attack the peg
ROBERT LEE, GRAND CAPITAL HOLDINGS