The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, has intervened to buy HK$3.258 billion of the local currency for the first time since the trading range was imposed in 2005, as the Hong Kong’s dollar fell to the weak end of its permitted band.
The purchase was made after the spot rate reached HK$7.8500 as the Asian trading day began on Thursday, touching the weak end of its HK$7.75-7.85 band against the U.S. dollar. The Hong Kong dollar last stood at 7.8498 to the dollar on Friday afternoon.
The HKMA is obligated under the city’s Link Exchange Rate System to buy the local currency at HK$7.85, a system designed to defend both ends of the band.
The intervention is seen as a significant move because the purchases could potentially raises borrowing costs by draining liquidity, which would in turn mark the end of an era of ultra-cheap money that made Hong Kong the world’s least affordable place in terms of housing prices.
The last time the HKMA bought Hong Kong dollars was in 2005, shortly before the new band was implemented to limit funds flowing into the city to bet on a strengthening Chinese yuan.
The Hong Kong dollar has continued to weaken since 2015 as The U.S. Fed raised interest rates five times since then, a move that widened the interest rate spreads between HKD and their USD counterparts. As a result, funds were seen to flow from the HKD into the USD.
Despite increasing pressure on the HKMA to intervene as the local currency continued to fall, chief executive Norman Chan said earlier in the year that the HKMA would only step in when the exchange rate reached HK$7.85.
“Hong Kong Monetary Authority does not have plans to issue Exchange Fund bills to mop up liquidity in the market although the Hong Kong dollar fell to a new 33-year low at HK$7.84 against per dollar,” Chan said in March when the HKD slid to a fresh 33-year low.
“It is only natural that the HKD would weaken as a result (of the U.S. rate hike),” said Chan. “The HKMA will take action when the HKD exchange rate touches the weak-side Convertibility Undertaking (7.85) to ensure that it will not fall below 7.85.”
“I think they are probably worried that they will be seen as providing some kind of a sure bet because when we hit the barrier, we know what will happen,” said Cliff Tan, East Asian head of global markets research at Bank of Tokyo-Mitsubishi UFJ in Hong Kong, in response to the lack of action by HKMA in March.
In fact, the current pegged currency system has come under fire in multiple occasions in the past, mostly by global hedge funds that have bet the city would abandon the link as it strengthened relations with China.
“They expanded EF bill issuance last year between August and October. They have realized that the impact of that policy is temporary anyway, it stabilized the USD-HKD but here we are again, with Hong Kong dollar continuing to weaken and the rate differentials continuing to widen,” said Mirza Baig, head of FX and rates strategy at BNP Paribas in Singapore.
“So maybe the assessment is that we let the markets decide where interest rates should go and we just police the band, which is our main policy tool anyway.”
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