The Hong Kong Monetary Authority (HKMA) intervened twice in the foreign exchange market overnight as gaping interest-rate differentials encouraged carry trades and pressured the local currency to the weak side of its trading band.
The authority sold a total of US$3.775 billion during New York trading hours on Thursday, and bought the equivalent of HK$29.634 billion at HK$7.85 per dollar, it said in a statement on Friday. The moves would reduce the aggregate balance – a measure of the banking sector’s liquidity – by the same amount to HK$114.541 billion on July 7, it added.
The local currency traded at HK$7.8488 after the market intervention. The HKMA had earlier sold US$2.55 billion on July 1 and US$1.2 billion on June 26 in New York to defend the currency peg.
Hong Kong pegged its currency to the US dollar in 1983 at HK$7.80 per dollar. In 2005, the HKMA introduced a narrow trading band, allowing its value to fluctuate between HK$7.75 and HK$7.85. Under the linked exchange rate system, the HKMA is obliged to intervene to preserve the trading band.
The depreciation pressure came from carry trades, in which investors borrow in a low-interest-rate currency to invest in assets denominated in a higher-yielding currency. The overnight interbank rate in Hong Kong stood at 0.02 per cent, versus 4.3 per cent in the US. Local three-month bills currently yield about 0.58 per cent, while similar US Treasury bills pay 4.35 per cent.
The gap is “mouth-watering” for traders looking for profit from the rate differentials, according to Ryan Lam Chun-wang, head of Research for Hong Kong at Shanghai Commercial Bank.
