Hong Kong intervenes to defend peg

By BLOOMBERG

HONG KONG • 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 (HKMA) bought HK$2.159 billion (RM1.13 billion) 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$7.8500 as of 4:22pm local time yesterday.

The permitted trading range for Hong Kong dollar is HK$7.75-HK$7.85 against the dollar.

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 Corp.

The HKMA has spent HK$72.5 billion 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$107.25 billion today.

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 Holdings plc and BOC Hong Kong Holdings Ltd lifted the cap for mortgages linked to local interbank rates on Aug 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 Ltd.

The city’s aggregate balance may drop below HK$100 billion in the short run, she said.