Hong Kong’s $6.5 Billion Intervention Mops Up 30 Percent of Cash

The Hong Kong Monetary Authority bought a total of $6.5 billion in defense of the local dollar’s peg to the greenback in the past week, a move that will drain about 30 percent of the aggregate balance of liquidity by Friday.

The de facto central bank took its buying of the local dollar since last week to HK$51.3 billion ($6.5 billion), with the city’s three-month borrowing cost spiking to the highest level this year. The aggregate balance of interbank liquidity will be drawn down to HK$128.5 billion on Friday, compared with the pre-intervention level of HK$180 billion. If the HKMA keeps the average pace of its intervention, the aggregate balance will be drained in about three weeks, Credit Agricole CIB strategist Gary Yau wrote in a note Wednesday.

“We are somewhat surprised by the size of outflows so far and, more importantly, they are both consistently large and also increasing,” Yau said. “The pattern and size of HKMA operations so far suggest that the aggregate balance will be down to low levels fairly soon, at which point the gap between U.S. rates and H.K. rates should reduce sizeably in our view.”

The Hong Kong dollar edged 0.01% higher to HK$7.8494 against the greenback as of 10:13 a.m. local time. The three-month interbank rate — known as Hibor — jumped for a fourth day on Wednesday, climbing to the highest level since Dec. 27 at 1.32 percent. Its discount to the U.S. Libor remained above 1 percentage point — a level that makes shorting the city’s currency still attractive.

The HKMA will likely reduce the amount of purchase next week, as the aggregate balance may drop to HK$100 billion with declines in short positions on the Hong Kong dollar, said Carie Li, an economist at OCBC Wing Hang Bank in Hong Kong.

Source:BLOOMBERG