Hong Kong’s de facto central bank has intervened in foreign exchange markets to defend the city’s currency peg in a move that threatens one of the world’s most attractive carry trades.
The Hong Kong Monetary Authority said it used HK$9.4bn ($1.2bn) of its reserves to buy Hong Kong dollars on the open market. It acted after the local currency dropped past HK$7.85 per US dollar, the weak end of the band within which it is allowed to trade.
The move will drain liquidity from the banking system and is expected to push up interbank lending rates, potentially threatening a carry trade that has allowed investors to borrow cheaply in the city’s currency before investing in higher-yielding US Treasuries.
This is the second intervention in as many months. In early May, the Hong Kong dollar appreciated, forcing the HKMA to sell Hong Kong dollars on the open market and flooding the city’s banking system with cash that pulled overnight rates close to zero.
The short time between interventions on either side of the currency peg reflects heightened market volatility globally.
“It’s barely one and a half months and they are already intervening on the other side,” said Wee Khoon Chong, a senior strategist at BNY.
Analysts said that, although the intervention would push up lending rates in the city, it would not necessarily end the carry trade.
“We have to just wait. If Hibor [Hong Kong Inter-bank Offered Rate] doesn’t go up too much and the dollar rates remain the same, there might be some room to maintain the carry,” said Raymond Yeung, chief economist for greater China at ANZ.
A string of IPOs in the city and record investment inflows from mainland China have increased liquidity in the city’s banking system and raised demand for Hong Kong dollars, helping keep Hibor low.
“We don’t think [Hibor] is going to go back to the previous high,” said Chong. “We don’t think the intervention will be as persistent as the capital inflows.”
“The loan-to-deposit ratio is still very low. There’s nowhere for the money to go,” Yeung said. “My bias is still having low Hibor.”
