Hong Kong is rushing to intervene as the country’s currency inches alarmingly near to unhinging from its USD peg.
This month alone, the Hong Kong Monetary Authority has invested HK$ 7.4 billion (US$ 1 billion) to purchase its domestic currency to defend the peg, after having bought HK$ 2.01 billion (US$ 256 million) on Monday.
The city’s reasonably lower rates of interest aim to boost trade. One-month rates in Hong Kong were at 1.57% on Monday, versus 2.48% in the US.
The Hong Kong dollar was last at HK$ 7.8498 per the United States dollar, near HK$ 7.85– the weak end of the trading band.
The regional currency hit its 35-year low at 7.8500 per greenback in April 2018.
The city’s central bank stepped in a number of times last year, having more than cut in half the aggregate balance of interbank liquidity, which is now just over HK$ 70 billion (about US$ 9 billion).
However, there’s no reason for the city to stress due to the fact that it has more than US$ 434.5 billion of foreign reserves, which is amongst the top 10 worldwide according to IMF numbers.
At the same time, Hong Kong has more than HK$ 1 trillion (US$ 127 billion) of exchange fund expenses outstanding, which allows the city to introduce cash by permitting that financial debt to develop.
At the heart of the experts’ analysis is a guess on how low the city’s total balance can proceed banks before the financial institutions feeling a funding squeeze. That’s difficult to evaluate provided the liquidity procedure has swung between HKD426 billion and HKD71 billion in the previous decade.
Today, it sits at just over HKD70 billion, low relative to historical reserves, but the trade gap between Hong Kong and U.S. remains wide. There’s little to stop traders selling the city’s dollar and collecting the profits in the higher-yielding U.S. currency.
Chinese stock rally weighs on Hong Kong dollar.
According to Ronald Man, a strategist at Bank of America Merrill Lynch, equity financiers are selling the currency for the Chinese yuan and purchasing mainland shares through the stock trading links, weighing on the HKD in spot markets.
The currency has been at the weak end of its trading band for much of this month.
Net northbound fund flows climbed to around 130 billion yuan ($ 19.4 billion) this year as of Monday, with sentiment assisted by Beijing’s looser monetary policy and an easing of the trade war with the U.S.
The yuan has advanced 2.4 percent this year, Asia’s second-best currency, and is near its highest versus the Hong Kong dollar since July.