(Yicai Global) April 17 -- Hong Kong Monetary Authority (HKMA), the special administrative region’s de facto central bank, has pumped a total of HKD13.251 billion (USD1.68 billion) into its banking system over the last five days to maintain currency stability.
HKMA most recently injected HKD3.587 billion into the market yesterday afternoon after the Hong Kong dollar touched HKD7.85 against the dollar, the weak end of its permitted range.
After the Hong Kong dollar first weakened to HKD7.85 against the greenback on the evening of April 12, HKMA bought HKD816 million from the market, marking first purchase operation since the current trading band was imposed in 2005. Then, in the early hours of April 13, the authority bought another HKD2.442 billion. However, the local currency once again touched HKD7.85 against the dollar and it bought a further HKD3.038 billion to maintain balance. On the early morning of April 14, there was another purchase of HKD3.368 billion.
The Hong Kong dollar has been weakening against the greenback for some time. The US Federal Reserve has raised interest rates six times since December 2015, but Hong Kong’s dollar interests have not followed suit, making its interest rates lower than that of US currency. As the difference in interest rates between Hong Kong Interbank Offered Rate and US borrowing costs -- London Interbank Offered Rate (Libor) -- gradually widened, investors took the opportunity to convert Hong Kong dollars to earn interest spreads, which caused the exchange rate of the Hong Kong tender to fall.
Although the Fed is in the process of hiking its interest rate, the monetary policies of the European Central Bank and Bank of Japan remain loose, so the Hong Kong market currently has a higher base currency balance, leading to ample liquidity, a research note from Everbright Securities Co. states, adding that investors sold their Hong Kong dollars to buy higher-yielding US currency to profit, and therefore the exchange rate was suppressed.
The HKMA had intervened market in the past, selling Hong Kong dollars when its exchange rate against the greenback was close to the strong end of its permitted range of HKD7.75. The most recent large-scale intervention took place in October 2012 when HKMA looked to maintain stability when the Fed’s third round of quantitative easing measures (QE3) flowed into the special administrative region’s market, resulting in a stronger Hong Kong dollar.
Editor: William Clegg