Hong Kong takes action to uphold currency's fixed rate
Here's the revised article:
Hong Kong's monetary authority has cracked down on a popular investment strategy, rattling global markets. The Hong Kong Monetary Authority (HKMA) has dipped into its reserves and intervened in the foreign exchange market to beef up the Hong Kong dollar (HKD), threatening one of the world's most lucrative carry trade opportunities.
In a move that drains liquidity from the city's banking system, the HKMA spat out a whopping HK$9.4 billion (about $1.2 billion) to purchase HKD on the open market. This action comes after the HKD slid below HK$7.85 per US dollar, marking the weaker end of the band within which it is allowed to trade.
This intervention follows another similar event just one and a half months ago, when the HKD appreciated, forcing the HKMA to offload HKD on the open market and flood the city's banking system with cash, pulling overnight rates close to zero.
Analysts say that the recent intervention will drive up lending rates in the city, but it may not necessarily ring the death knell for the carry trade. They caution investors to hang tight and observe whether Hibor (Hong Kong Inter-bank Offered Rate) rises substantially and if USD rates remain stable. If that happens, there might still be room to keep the carry trade rolling.
A string of IPOs and record investment inflows from mainland China have boosted liquidity in the city's banking system and elevated demand for HKD, keeping Hibor low. Some believe that Hibor will not retrace its previous highs, and the intervention might not be as prolonged as the capital inflows.
"The loan-to-deposit ratio is still quite low. There's nowhere for the money to go," analysts said, maintaining their belief in a low Hibor.
The HKMA operates a currency board system, pegging the HKD to the USD at around 7.80 HKD/USD, with a permitted trading band of 7.75 to 7.85. To maintain this peg, the HKMA intervenes by buying or selling HKD and USD accordingly – selling HKD during periods of HKD strength near the strong side (7.75) to inject liquidity, and buying HKD during episodes of HKD weakness near the weak side (7.85) to withdraw liquidity.
This intervention regime creates a dynamic environment where the carry trade profitability is closely linked to the HKMA’s currency defense actions. Liquidity injections during interventions near the strong HKD boundary sharply lower local interest rates, boosting carry trade profitability, while liquidity withdrawals near the weak boundary increase borrowing costs, limiting carry trade incentives.
In summary, the HKMA's foreign exchange interventions have a significant impact on Hong Kong's carry trade by managing liquidity and interest rates to maintain the HKD/USD peg within tight bands. This creates a dynamic environment where the profitability of the carry trade is closely linked to the HKMA's currency defense actions.
- The intervention by the Hong Kong Monetary Authority (HKMA) in the foreign exchange market, aimed at strengthening the Hong Kong dollar, could potentially impact investment strategies in the finance and banking sector, as the high lending rates might deter the carry trade.
- The revised article highlights the close link between the Hong Kong Monetary Authority's (HKMA) currency defense actions and the profitability of the carry trade, as these actions significantly influence the liquidity and interest rates in the markets, thus affecting business decisions related to investment.
