Hong Kong tightens liquidity with $192-M peg defense

HONG KONG faces the likelihood of rising borrowing costs after the city’s de facto central bank intervened to defend its currency peg for the first time since August.

The Hong Kong Monetary Authority (HKMA) bought HK$1.51 billion ($192 million) of local dollars during London and New York trading hours after the currency fell to the weak end of its trading band, it said in a statement on Saturday. The move will reduce the aggregate balance, a measure of interbank liquidity, to a decade low of HK$74.8 billion.

While the size of the buying was small relative to some of the HKMA’s interventions last year, continued weakness in the currency may prompt the central bank to drain more liquidity. That would intensify pressure on home values in the world’s most expensive property market, and weigh on the city’s economy. Just 11 months ago the aggregate balance stood at about HK$180 billion.

“The Hong Kong dollar will remain under pressure in the near term, so the local authorities will intervene further to defend the peg,” Irene Cheung, a senior strategist at Australia & New Zealand Banking Group, said. “Interbank borrowing costs will rise gradually due to the liquidity drainage, but they won’t spike as the scale of intervention will be smaller compared with last year.”

The Hong Kong dollar was little changed at HK$7.8497 per greenback as of 1:37 p.m. local time. The three-month interbank borrowing costs on the currency, known as Hibor, climbed the most since December, while the one-month tenor rose to the highest since January 10 on Monday. Bloomberg News