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Abu Dhabi, UAETuesday 25 September 2018

Hong Kong Dh2.8bn weekend spend to prop local dollar

Intervention is a form of tightening in a city which imports US monetary policy thanks to its peg to the greenback

Cheung Kong Centre (R) and the Bank of China Tower at Hong Kong's business Central district. Billions are being spent to bolster local currency. Bobby Yip/Reuters
Cheung Kong Centre (R) and the Bank of China Tower at Hong Kong's business Central district. Billions are being spent to bolster local currency. Bobby Yip/Reuters

Currency intervention is becoming a daily necessity for Hong Kong as the local dollar continues to trade at the weak end of its trading band.

The Hong Kong Monetary Authority spent HK$5.99 billion (Dh2.8bn) buying local dollars as the weekend began, bringing its purchases over the past week to HK$19bn. Lower interest rates relative to the greenback have made shorting the currency a lucrative trade.

The intervention is a form of tightening in a city which imports US monetary policy thanks to its peg to the greenback. The HKMA’s aggregate balance of interbank liquidity will fall to HK$109.5bn on Wednesday, down from HK$179.8bn before the de facto central bank began defending the currency last month.

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"The carry trade of shorting the Hong Kong dollar will remain frequent, prompting the HKMA to keep intervening," said Tommy Ong, managing director for treasury and markets at DBS Hong Kong. "Interbank liquidity is still flush with aggregate balance nearing HK$100bn. The city’s interest rates may catch up with US borrowing costs only after the aggregate balance falls to HK$20bn to HK$50bn."

The city’s three-month interbank rate has jumped nearly 60 basis points to 1.75 per cent since the HKMA began intervening. That’s still 58 basis points below the US equivalent, suggesting pressure on the Hong Kong dollar will persist. The currency was little changed at HK$7.8496 per greenback as of 5:26pm local time, near the HK$7.85 weak end of the band.

"The aggregate balance will fall at a gradual and orderly pace with HKMA’s modest intervention,” said Ken Cheung, a currency strategist at Mizuho Bank in Hong Kong.

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