Hong Kong’s de facto central bank continued to intervene in the currency market, bringing the week’s spending to HK$16.76 billion (US$2.1 billion) of its US$432 billion in foreign reserves, as it defends the local dollar.
The withdrawal of banking liquidity resulting from the Hong Kong Monetary Authority’s intervention brings a key property-loan interest rate closer to a tipping point that would leave homeowners with higher mortgage payments.
On Wednesday, the HKMA bought HK$14.6 billion as the Hong Kong dollar fell to 7.8500 per US dollar, the weak end of its trading band. The Hong Kong dollar was trading at 7.8496 against the US dollar on Thursday evening, still close to the lower limit of its permitted trading range of 7.75 to 7.85 per dollar.
A combination of factors in recent days has driven capital out of Hong Kong, including Turkey’s currency crisis and the resumption of a so-called arbitrage trade where investors buy the higher-yielding US dollar and sell lower-yielding local currencies.
The HKMA is ready to provide additional liquidity by adjusting the volume of exchange fund bills – currently about HK$1 trillion – it issues if needed, to cope with outflows, said Norman Chan, its chief executive, in a statement on Thursday.
Over the years, the HKMA has issued exchange fund bills to investors in an effort to drain excessive banking funds during periods of strong capital flows into the city. In the same vein, the HKMA can let the exchange fund bills mature without rolling them over, resulting in an injection of liquidity back into the interbank market.
The market widely expects the US Federal Reserve to raise interest rates again in September and December this year, which is likely to be followed by benchmark rate increases by the HKMA to maintain Hong Kong’s currency peg to the US dollar.
While that is likely to put pressure on the city’s commercial banks to raise their prime rates after keeping them unchanged for the last 10 years, analysts were split as to the exact timing for them to do so – whether banks would choose to raise their prime rates in September or in December.
“People expect prime rates to go up this year because there are outflows from the city. But the exact timing still depends on how fast interbank rates are actually rising,” said Eddie Cheung, Asia currency strategist at Standard Chartered Bank.
The HKMA’s intervention is expected to reduce the city’s aggregate balance – a measure of banking liquidity – to HK$92.6 billion, dipping below the HK$100 billion level for the first time since 2008, a level analysts have said would make market interest rates more sensitive to tighter liquidity conditions.
But in recent days demand for Hong Kong dollar funds have also declined amid a weak equity market so analysts said the current liquidity tightening trend would take a temporary pause. HSBC cut its Hong Kong dollar-denominated new fund time deposit rates by up to 20 basis points on Wednesday, reflecting a slight easing of liquidity for the lender.
The disappointing market response to the jumbo listings by China Tower and Xiaomi also pointed to a more muted IPO pipeline and demand for Hong Kong dollar funds, analysts said.
After surging nearly 170 basis points in a year to a 10-year high by late June, the 1-month Hibor – the rate at which the city’s banks lend to each other – has since retracted lower by 74 basis points to a current level of 1.38 per cent.
“Banks will probably raise prime rates after a few more rounds of HKMA interventions and when the aggregate balance falls to HK$50 billion or even HK$20 billion,” said OCBC-Wing Hang Bank’s economist Carie Li.
This article originally appeared on the South China Morning Post (SCMP), the leading news media reporting on China and Asia. For more SCMP stories, please download our mobile app, follow us on Twitter, and like us on Facebook.
Copyright (c) 2018. South China Morning Post Publishers Ltd. All rights reserved.
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