HONG KONG: The Hong Kong Monetary Authority HKMA stepped into currency markets for the first time in 18 months, twice buying Hong Kong dollars to stop the local currency weakening and breaking its peg to the US dollar.
The central bank bought HK$1.586 billion US $202 million from the market in UStrading on Wednesday and HK$4.082 billion in Hong Kong trading on Thursday.
The Hong Kong dollar is pegged to a tight band between 7.75 and 7.85 versus the US dollar. It's been softer as U.S. interest rates rise while a surfeit of cash keeps Hong Kong rates pinned down by a surfeit of cash in the local banking system.
One-month US dollar Libor, a benchmark lending rate, is close to 0.8 per cent - its highest since April 2020 - while the Hong Kong equivalent, one-month Hibor, is barely above its COVID 19 pandemic lows.
HKMA's Chief Executive Eddie Yue said last week that as it intervenes and funds flow out of Hong Kong's system, local rates should rise, removing the incentive for market players to conduct carry trades and hence keep the Hong Kong dollar trading within its band.
He said that all of these operations are normal operations in accordance with the design of the Linked Exchange Rate System.
This arrangement was created in 1983 and has survived many crises over the years, including an attack by famed short-seller George Soros during the Asian financial crisis of 1997 -- 98.
The HKMA intervened in October 2020. In March 2019, HK sold $383.5 billion worth of HK to rein in the strengthening currency, according to HKMA data, while it intervened at the weak end of the band in March 2019.
The aggregate balance, the key gauge of cash in the banking system, will decrease to HK $331.923 billion on May 16, a HKMA spokeswoman said on Thursday.
In 2019 it dropped to around HK $50 billion after the last series of HKMA interventions to stop the currency weakening.
In 2020, it surged to more than HK $450 billion as capital rushed into Hong Kong, drawn by higher interest rates locally than in the US and a series of large initial public offerings.