HKMA buys Hong Kong dollar at record pace as peg gets tested

HONG KONG • Hong Kong's de facto central bank bought the local dollar at the fastest pace on record this month to defend its currency from crossing the weak end of its trading band.

The Hong Kong Monetary Authority (HKMA) bought HK$78.1 billion (S$13.8 billion) so far this month, including its HK$20.8 billion purchase on Tuesday.

The currency still continues to linger near the weak end of its 7.75-to-7.85 per greenback trading band.

The downward pressure on the Hong Kong dollar reflects outflows due to a widening interest-rate gap with the United States rather than speculative attacks on the currency peg.

The city's aggregate balance - a gauge of interbank liquidity - remains high, making it relatively cheap for traders to short the currency against the higher-yielding greenback.

While the three-month Hong Kong interbank offered rate, or Hibor, rose to a two-year high this week, it is still more than 60 basis points below the US equivalent.

This indicates that the HKMA will have to drain cash levels further to cap outflows.

"Dollar rates are set to rise further upon expected aggressive Federal Reserve rate hikes," said Ms Frances Cheung, rates strategist at OCBC Bank in Hong Kong.

This is likely to keep the downward pressure on the Hong Kong dollar and interventions are likely to continue, she said.

HKMA chief executive Eddie Yue had said earlier this week that the HKMA may accelerate purchases of the local currency until the city's interest rates approach the US level, Sing Tao Daily reported.

The Hong Kong dollar was little changed at 7.8499 per greenback as at 1.24pm local time.

Risk-reversals show a premium to hedge dollar-Hong Kong dollar's downside, signalling muted market concern over the possibility of the currency pair rising above 7.85.


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A version of this article appeared in the print edition of The Straits Times on June 23, 2022, with the headline HKMA buys Hong Kong dollar at record pace as peg gets tested. Subscribe