Hong Kong’s brief pause from defending its currency proved to be short-lived, as the authorities were forced to buy local dollars for the third time in a week amid stock outflows and carry trade pressure.
The Hong Kong Monetary Authority (HKMA) bought HK$6.429 billion ($819 million) of the local currency on Tuesday, in addition to its purchases on Aug 1 and July 30. That’s after being absent from the market for two weeks.
The resumption of currency intervention underscores the persistent depreciation pressure on the Hong Kong dollar, as the city’s wide interest-rate gap with the US spurs traders to short the local currency in favor of the higher-yielding greenback.
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“Southbound equity outflows and an abating of seasonal demand may have left the selling Hong Kong dollar pressure dominant,” said Carie Li, global market strategist at DBS Bank. “The wide yield differential will keep carry trades active, so more intervention is likely to come ahead.”
The HKMA has been intervening to cap the local dollar’s losses since June as it deals with the repercussions of efforts earlier this year to restrain the currency’s strength. Its earlier sales of the Hong Kong dollar caused local rates to tumble versus those in the US, heaping pressure on the currency.
The monetary authority withdrew a total of HK$13.89 billion of liquidity from the market in a week via its purchases of the local currency, according to Bloomberg calculations, to keep it boxed in a 7.75-7.85 per dollar range.
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Traders expect the HKMA to fight a prolonged battle to counter the depreciation pressure as withdrawing cash too quickly would send local rates surging and hurt the already frail economy. However, rising expectations of Federal Reserve rate cuts following last week’s shocking US jobs data could provide some relief for the HKMA if the rate gap between the two economies narrows.
“The buying of USD/HKD is probably driven by the ongoing carry trade, which might not last long if markets were to price in more US rate cut following the soft US job market last week,” said Wee Khoon Chong, senior APAC market strategist at BNY in Hong Kong.
