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Abu Dhabi, UAEThursday 20 September 2018

Hong Kong moves to defend dollar peg as currency weakens

Turkey-induced turmoil in emerging markets has spurred risk aversion among investors

A bank electronic board showing the Hong Kong share index. The local currency has weakend. AP
A bank electronic board showing the Hong Kong share index. The local currency has weakend. AP

Hong Kong intervened to defend its peg to the dollar for the first time in three months after the local currency fell to the weak end of its trading band.

The Hong Kong Monetary Authority bought HK$2.159 billion (Dh1bn) of local dollars during New York trading hours on Tuesday, according to the de facto central bank’s page on Bloomberg. The last intervention was on May 18. The city’s currency traded at HK$7.8499 as of 12:41pm local time, near the weak end of its permitted trading range of HK$7.75 to HK$7.85.

The Turkey-induced turmoil in emerging markets has spurred risk aversion among investors and strengthened the greenback, putting the Hong Kong dollar under pressure. Lower rates than the US have also made the local currency an attractive target for shorting.

"Further intervention cannot be ruled out as Hong Kong dollar is trading very near HK$7.85 per dollar," said Frances Cheung, Singapore-based head of Asia macro strategy at Westpac Banking.

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The HKMA has spent HK$72.5bn so far this year protecting the currency system, which has the effect of tightening liquidity in a city that’s enjoyed ultra-low borrowing costs as it imports US monetary policy. The aggregate balance of the banking system will drop to HK$107.25bn on Thursday.

The city has the ability to cope with market volatility and the challenges of capital outflows, HKMA deputy chief executive Howard Lee said in an emailed statement on Wednesday.

One-year Hong Kong interbank rates gained by the most in a month after the monetary authority’s action, according to fixing from Hong Kong Association of Banks.

The intervention also came as Hong Kong unexpectedly posted a quarter-on-quarter economic contraction for the three months ended June on the back of rising local rates. Home loan rates had their biggest jump in five years after major lenders including HSBC and BOC Hong Kong lifted the cap for mortgages linked to local interbank rates on August 13.

The Hong Kong dollar is likely to stay weak in the near term, inviting more intervention from the monetary authority, said Irene Cheung, a foreign-exchange strategist at Australia & New Zealand Banking Group. The city’s aggregate balance may drop below HK$100bn in the short run, she said.

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