The Hong Kong Monetary Authority (HKMA) sold US dollars and bought HK$9.42 billion ($1.2 billion) during the New York trading hours earlier on Thursday after the local currency hit the weak end of the convertibility guarantee — HK$7.85 per US dollar. This marks the first time in two years that the local currency has hit the weak side of the band.    

The move will reduce the banking system's aggregate balance, the key gauge of cash in the banking system, to HK$164.1 billion on Friday.

In May, the HKMA conducted four interventions, spending HK$129.4 billion to purchase US$16.7 billion in US dollars to weaken the local currency amid an influx of capital from international investors.

READ MORE: Hong Kong buys record amount of US dollars to defend peg

Eddie Yue Wai-man, chief executive of the HKMA, said: “The subsequent abundance of liquidity in the Hong Kong dollar market led to a decline in Hong Kong dollar interbank rates, and the widened Hong Kong dollar-US dollar interest rate differential incentivized carry trade activities that sold Hong Kong dollars for US dollars, causing the Hong Kong dollar exchange rate to weaken.”

Furthermore, market demand for Hong Kong dollars declined recently due to a combination of factors, including the peaking of the stock dividend payout season, the currency conversion of Hong Kong dollar proceeds raised from recent IPOs or bond issuances by non-local companies for repatriation, as well as the wrapping up of the seasonal half-year-end funding preparation, Yue added.      

The last time the HKMA supported the weak Hong Kong dollar was in 2023, when it intervened eight times, buying a total of HK$54.51 billion in local currency. This followed 41 interventions in 2022, during which the HKMA purchased HK$242.08 billion.          

Alvin Ngan, an equity strategist at Zhongtai Financial International, told China Daily that the widening Hong Kong dollar-US dollar interest rate differential, reaching a record 3.6 percent, was the main driver behind the HKMA’s move to support the local currency.

Meanwhile, some companies that recently listed in Hong Kong, such as CATL, Sanhua, and Haitian, are converting their Hong Kong dollar IPO proceeds into other currencies for repatriation or overseas investments, creating additional downward pressure on the Hong Kong dollar, Ngan said.

READ MORE: HK dollar interest rate falls most since 2008 after intervention

Ngan stressed that he does not anticipate material impacts on property or the equity market from the HKMA’s move, although capital outflows trigger liquidity absorption, as the HKMA's HK$9.42 billion intervention appears marginal compared to the HK$100 billion- plus injections in May.

Contact the writer at mikegu@chinadailyhk.com