HKMA intervention tipped to intensify

SHIFTING LIQUIDITY::Westpac’s Frances Cheung said a declining aggregate balance could prompt the Hong Kong Monetary Authority to add funds to the liquidity pool

Bloomberg

Tue, Sep 04, 2018 - Page 10

The Hong Kong Monetary Authority (HKMA) could be even busier with currency buying this month.

The territory’s de facto central bank, which spent HK$33.1 billion (US$4.2 billion) last month as the Hong Kong dollar (HKD) fell to the weak end of its trading band, is likely to continue making purchases, analysts said.

That is because the US Federal Reserve is likely to raise rates this month, drawing funds out of Hong Kong and keeping the Hong Kong dollar weak.

Lower interest rates relative to the greenback have made shorting the Hong Kong dollar a lucrative trade.

The regulator needs to buy the currency at the weak end of its trading band at US$7.85 per Hong Kong dollar to defend the peg with the greenback. It did that in April, May and again last month.

“August was probably just a rehearsal, given the absence of [Hong Kong] dollar strength,” said Alan Yip, Hong Kong-based senior foreign currency market strategist at Bank of East Asia Ltd (東亞銀行). “The HKMA is highly likely to drain liquidity at a faster pace in September as outflows will intensify along with a potential Fed hike.”

Continued intervention will tighten liquidity, which means borrowing costs in Hong Kong would rise.

The Hong Kong regulator’s defense of its currency peg has already lowered the aggregate balance, a measure of interbank liquidity, to HK$76.4 billion.

“Hong Kong’s aggregate balance may drop below a red line of HK$50 billion as soon as the end of September,” Yip said. “That will hurt market sentiment and raise concern of a dramatic surge in funding costs, reminding investors of the Asian financial crisis in 1998, when property prices and stock markets collapsed.”

Liquidity is also likely to be pressured by demand for seasonal funding by banks and corporations, and the potential for big stock offerings in the second half of September, said Eddie Cheung (張敬勤), Asia foreign-exchange strategist at Standard Chartered PLC in Hong Kong.

Meituan Dianping (美團點評), a Chinese restaurant review and delivery firm, has started gauging investor demand for a planned initial public offering in Hong Kong, people with knowledge of the matter said.

Hotpot chain Haidilao International (海底撈國際控股) yesterday began so-called investor education for a share sale.

Short-term Hong Kong dollar borrowing costs are rising, with the overnight rate yesterday climbing to the highest in two months.

The falling aggregate balance could spur the monetary authority to add funds to the liquidity pool so it can continue intervening in the currency market, said Frances Cheung (張淑嫻), head of macro strategy for Asia at Westpac Banking Corp in Singapore. “The HKMA may actively buy back exchange fund bills or simply not to roll them over upon maturity. That would shift liquidity to the interbank market, without increasing the monetary base.”

An HKMA spokesperson said in an e-mail to reporters that the monetary authority is “fully capable” of maintaining stability in the exchange rate and managing large capital flows.

“The HKMA also stands ready to calibrate the issuance of exchange fund bills to release liquidity in order to deal with possible sharp outflow from the HKD,” the spokesperson said.

Outstanding exchange fund bills stood at HK$1 trillion at the end of June. The Hong Kong dollar was little changed at HK$7.8495 per US dollar as of 2:49pm yesterday.