The Hong Kong Monetary Authority (HKMA) has stepped into the financial market for the first time since 2023 to support the weak local dollar, in an effort to thwart currency arbitrageurs who engage in so-called carry trades.
The city鈥檚 de facto central bank sold US$1.2 billion worth of US dollars to buy Hong Kong currency at HK$7.85 per US dollar, according to a statement on Thursday.
The action came after the local currency hit the weak end of its trading band at HK$7.85. The Hong Kong currency鈥檚 peg with the US dollar has been in place since 1983. In an initiative launched in 2005, the HKMA intervenes to maintain the exchange rate within the trading band of HK$7.75 to HK$7.85 per US dollar.
After settlement on Friday, the intervention is expected to decrease the HKMA鈥檚 aggregated balance 鈥 a measure of the Hong Kong banking sector鈥檚 liquidity 鈥 to HK$164.1 billion (US$20.9 billion), down by HK$9.42 billion.
鈥淲hen the aggregate balance drops, there [is] less liquidity in the interbank market, which would drive up short-term [interest] rates,鈥 said Tommy Ong, managing director of T.O. & Associates Consultancy. Hong Kong鈥檚 interbank offered rate, or Hibor, is the interest rate that banks charge each other and is used to price many loans in the city.
Enthusiasm for the stock market and many recent initial public offerings in Hong Kong would continue to attract capital inflows in the city, limiting any drastic drop in liquidity in the banking system, Ong said.
The aggregate balance could decline by about HK$500 billion to HK$700 billion, which could drive the one-month Hibor up to 2 per cent, from its three-year low of 0.5 per cent during the week of June 16, he said.
The HKMA last week warned of a potential intervention in the currency market and a possible jump in the interbank rate, which would mean mortgage borrowers would need to pay more.
One-month Hibor weakened to a three-year low of 0.5285 per cent on June 20, from 3.9836 per cent on May 2, according to the Hong Kong Association of Banks. The three-month rate, typically used to price corporate loans, fell to 1.5146 per cent from 4.0139 per cent.
Hibor at the level of early May would translate to a 23.8 per cent jump in monthly repayments for typical borrowers with HK$5 million, 30-year loan priced at one-month Hibor, according to local mortgage broker mReferral.
The city鈥檚 interbank rates have slumped since May after the HKMA鈥檚 last interventions flooded the market with liquidity by selling the local dollar to prevent it from breaking the strong end of the peg at HK$7.75.
Three-month interbank offered rates stood at 1.53 per cent on June 19, according to the Hong Kong Association of Banks. The equivalent US dollar overnight financing rate was 4.30 per cent.
The gap of more than 3 percentage points between the rates for the two currencies incentivised carry trades 鈥 a strategy that involves borrowing money in a currency with a low interest rate to invest in a currency with a higher interest rate. Such activity pushed the Hong Kong dollar towards HK$7.85 per US dollar over the past few weeks, the HKMA said on June 19.
鈥淚f carry trades are to persist, the Hong Kong dollar exchange rate may weaken further,鈥 it said. In such a case, the HKMA would intervene by selling US dollars and buying Hong Kong dollars, mopping up liquidity and gradually driving up local interbank rates, it added.
HKMA conducted four interventions in three days from May 4, spending HK$129.4 billion to buy US$16.7 billion worth of the US currency to weaken the local dollar amid an influx of capital from investors chasing popular new share listings.
The last time the HKMA needed to support the weak Hong Kong dollar was in 2023, when the authority intervened eight times by buying a total of HK$54.51 billion worth of local currency. That came after the HKMA bought a total of HK$242.08 billion in 41 market interventions in 2022.
Additional reporting by Aileen Chuang