Central bank buys $2.355b to defend weakening currency peg

The HKD fell as the greenback gained strength after Turkey’s market turmoil.

Bloomberg reports that the Hong Kong Monetary Authority (HKMA) purchased $2.355b of local dollars in Wednesday after the HKD once again plunged to the weak end of the trading band ($7.85) against the USD.

The intervention, which comes on the heels of an earlier purchase of $2.159b in Tuesday, marks the first intervention from the HKMA in three months when the HKD first touched the weak end of its $7.75-$7.85 band against the greenback last April.

Analysts pinpoint the Turkey-induced turmoil rattling emerging markets as the reason behind the sudden slide, strengthening the USD and putting pressure on the HKD.

“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.

So far, the HKMA has spent roughly $75b in 2018 to defend the currency system, pushing down the aggregate balance of the banking system to around $107.2b in August.

Also read: Dollar decline may trigger slowdown in housing market

The HKD plummeted to trade at $7.85 last April in the first breach since the range was imposed in 2005 as a means to curb the inflow of funds into Hong Kong and to bet on a stronger Chinese dollar.

However, investors need not worry needlessly about the health of financial system as the city remains flush with liquidity with the central bank holding around US$432b of foreign reserves as of end July.

The HKMA is fully capable of maintaining the stability of the HKD exchange rate and managing large-scale capital flows," HKMA deputy chief executive Howard Lee said in a statement, adding that the Exchange Fund holds over $4t worth of assets to shield against volatility.

The HKD Monetary Base also amounted to over $1.6t and banks held more than $4t of highly liquid assets at the end of 2017, providing a strong buffer in the event of fund outflows, he added.

Morever, a slew of blockbuster flotations is also expected to give a short-lived boost to the struggling HKD.

Here’s more from Bloomberg:

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