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Hong Kong currency board warns banks to watch for rate spike, tighter liquidity

ECONOMYNEXT – Hong Hong Monetary Authority warned banks that interest rates may rise and liquidity may tighten as it sold dollars to defend a hard peg at 7.85 HK dollars to a US dollars, to which it was fully committed

The HKMA said it had just sold US dollars to the value of 2.16 billion Hong Kong dollars to defend the hard peg (linked exchange rate system) and the aggregate balance of the banking system (excess liquidity) will fall to 107.2 billion dollars today.

In April and May the HKMA sold 70 billion HK dollars worth forex as outflows started with the US raising interest rates, tightening domestic rates.

However large initial public offerings had boosted liquidity and lowered interest rates, again triggering carry trade activities and some IPO funds were also leaving.

The outflows had put downward pressure on the HK dollar, which called the weak side of the Convertibility Undertaking (CU). The HKMA says it is fully committed to defending the peg and will sell dollars as needed.

"But I wish to reiterate that, when the weak-side CU is triggered, the HKMA will buy HKD and sell USD at 7.85 and ensure that HKD will not weaken beyond 7.8500 in the interbank market," Howard Lee, Deputy Chief Executive of the HKMA.

"The HKMA is fully capable of maintaining the stability of the HKD exchange rate and managing large-scale capital flows."

Since dollars sales are unsterilized, interest rates can go up and liquidity can tighten for banks.
"We remind everyone again to manage interest rate and market risks prudently," Lee said.

"The weak-side CU may be triggered again in the future depending on capital flows."

Lee said Hong Kong Monetary authority had over 4 trillion dollars of assets (about 509 billion US dollars) of which 80 percent was foreign exchange reserves and the Hong Kong dollar monetary base was only 1.6 trillion dollars. (Colombo/Aug16/2018)





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