Hong Kong Monetary Authority intercedes amidst Hong Kong dollar reaching its weaker boundary in the trading range.
Hong Kong's Currency Shuffle: HKMA Steps In to Keep the Peg Alive
Looks like the Hong Kong Monetary Authority (HKMA) has jumped into action once again! On Thursday, they sold a whopping 1.2 billion USD to shore up the Hong Kong dollar (HKD), which had slide to the weaker end of its trading band.
The HKD is tightly pegged to the US dollar within a narrow range of 7.75 to 7.85 HKD per USD, and the HKMA intervenes to keep it there. This band has been in place since 1983, intended to preserve confidence and stability in the currency and Hong Kong’s financial system.
Last week, the HKD hit the weak side of the band for the first time in two years, sparking the HKMA's intervention. The move will tip the aggregate balance, a key gauge of cash in the banking system, by HK$9.42 billion on Friday, according to the HKMA's statement.
If the HKD lingers weak and the HKMA continues its interventions, local currency liquidity might shrink even further. The HKD saw significant volatility over May and June as foreign and Chinese capital flooded into blockbuster share offerings and undervalued stocks in the Asian financial hub.
This influx triggered by these inflows strengthened the HKD, putting pressure on the HKMA to sell HKD to protect the peg. The resulting cash influx drove down domestic interbank rates, spurring speculative positions that used HKD borrowings to wager on other markets.
Last week, the HKMA hinted at uncertainty regarding the HKD's direction and local interbank rates due to carry trades and other factors.
The HKMA’s primary role is to maintain the stability of the pegged exchange rate system (LERS). When the HKD strengthens beyond the upper bound of 7.75 HKD to the USD, the HKMA intervenes to buy US dollars and supply HKD to bring the rate back within the band. Conversely, when the HKD weakens past 7.85, the HKMA sells US dollars to buy HKD, mopping up liquidity.
Other factors influencing the HKD's direction include US Federal Reserve interest rate hikes, geopolitical and trade tensions, market sentiment, and external economic and trade developments, particularly those involving the US, China, or Taiwan. Despite these challenges, the HKMA’s large reserves and long-standing currency board system have thus far preserved the peg’s integrity effectively.
The Hong Kong Monetary Authority (HKMA) is responsible for maintaining the stability of the pegged exchange rate system, and it interferes when the Hong Kong dollar (HKD) strays from its trading band to preserve currency and business stability. If the HKD continues to weaken and the HKMA's interventions persist, it might lead to a decrease in local currency liquidity, potentially impacting the overall business environment in Hong Kong.
