A glut of cash in Hong Kong's financial system has pushed down market interest rates, depressing the city's currency and forcing authorities to spend $692 million of foreign reserves defending its long-running link to the U.S. dollar.
The Hong Kong Monetary Authority intervened for the first time this year late last week, selling U.S. dollars to buy 1.51 billion Hong Kong dollars ($192 million) in London and New York trading hours on Friday.
On Wednesday, the territory's de facto central bank said it had bought an additional 3.93 billion Hong Kong dollars and sold US$500 million during New York hours the previous day.
The authority moved to prevent the Hong Kong dollar from weakening beyond 7.85 to the U.S. dollar--the weakest level allowed under the financial hub's currency peg. The authority says it will step into the market to keep the Hong Kong dollar between 7.75 and 7.85 per dollar, a system it has followed since the peg was last tweaked in 2005.
The Hong Kong dollar recently traded at 7.8498 per U.S. dollar.
A gulf in interest rates has fueled the recent decline. An abundance of liquidity in Hong Kong has pushed interbank rates down since December. Meanwhile, U.S. funding costs have been higher and more stable, boosting the allure of parking cash in U.S. dollars. Similar pressure forced the monetary authority to defend the peg several times last year.
Weak loan demand and a lack of large companies going public have contributed to the cash sloshing around Hong Kong's financial system, depressing rates, according to Howard Lee, the deputy chief executive of the monetary authority. In a weekend statement, after the first intervention, he said it would not be surprising if the de facto central bank had to intervene again.
The one-month Hong Kong interbank offered rate, or Hibor, is about 1 percentage point below its U.S. equivalent, meaning the pressure could continue. "This still is quite an attractive carry-trade opportunity," said Ken Cheung, a senior Asian foreign-exchange strategist at Mizuho Bank in Hong Kong. In a carry trade, investors borrow in a currency with low interest rates and use it to buy higher-yielding assets elsewhere.
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