As Hong Kong’s dollar rose to with its trading limit during trade in Europe on Wednesday, the Hong Kong Monetary Authority sold off HK$2.209 billion ($285.03 million) to defend the city’s currency peg.
The aggregate balance of the local banking system is expected to increase to HK$120.616 billion, Reuters news reported on Wednesday.
The listings of NetEase and JD.com have diversified the structure of the Hong Kong stock market, which is a positive development for the Hong Kong dollar
Linus Yip Sheung-chi,
chief strategist at First Shanghai Securities
Since June, HKMA has been conducting sales of more than HK$20 billion to keep the local currency within its trading band. The Hong Kong dollar is tightly pegged to the greenback at a rate of 7.75-7.78 per US dollar.
Analysts say recent actions by the HKMA indicate there might not have been significant fund outflows from either the Hong Kong dollar or from the city’s banking system — but rather a significant inflow of Hong Kong dollars.
On Tuesday, the HKMA sold HK$2.658 billion during New York trading hours after selling HK$1.938 billion during Asian trade, according to data released by the HKMA. This was needed to maintain Hong Kong dollar’s traditional currency link with the United States dollar.
Linus Yip Sheung-chi, chief strategist at First Shanghai Securities, said Chinese tech giants such as NetEase and JD.com, which sought secondary listings in Hong Kong, have attracted large capital inflows. This might be making the Hong Kong dollar stronger, he explained.
Yip said that the listings of NetEase and JD.com have diversified the structure of the Hong Kong stock market, which is a positive development for the Hong Kong dollar.
In addition, the spread between the interbank reference rate in Hong Kong (HIBOR) and the London Interbank Offered Rate (LIBOR) has mostly been expanding over the past year. Terence Wu, a FX strategist with OCBC Bank, said this had enhanced the attractiveness of the Hong Kong dollar relative to the US currency.
Wu said repeated reassurances regarding the peg also encouraged investors to re-engage in “carry trade” in favor of the Hong Kong currency. Carry trade is when investors borrow at a low rate of interest to invest in assets offering higher returns.
“The recent risk-on sentiment and the corresponding weakness in the US dollar has also reinforced the carry trade dynamic, resulting in the increase in US dollar-Hong Kong dollar pressure against the bottom of peg,” he explained.
OCBC Bank expects the Hong Kong dollar will keep re-testing the strong side. This is likely to prompt more intervention in future. The aggregate balance will grow to HK$120-HK$150 billion which will in turn guide HIBOR lower.
Hong Kong has operated the linked exchange rate system or ‘‘dollar peg” with the US dollar since 1983.
