HKMA insists liquidity injection of HKD is just passive operation

It’s in no way a policy shift.

The HKMA announced on 1, 9 and 10 July that it had injected HKD and bought US dollars (USD) to prevent the fall of USD-HKD below the 7.75 Convertibility Undertaking floor, but it has been stated that the latest HKMA FX intervention is part of the LERS’ normal operations to maintain the stability of the HKD.

According to a research report from Standard Chartered, the intervention of the KHMA, the first time it has stepped into the market since 2012, is not representative of any shift in HKMA policy.

The report also said that the injection of HKD liquidity is also a passive operation and does not signify an active HKMA role, and that the LERS intervention mechanism is tried and tested, noting that the peg has been in place for over 30 years.

According to the HKMA, HKD demand has increased owing to “commercial activities, including merger and acquisition activities and dividend distribution,” said the report.

Here’s more from Standard Chartered:

We believe capital inflows and a weak USD have also played a role in USD-HKD’s downtrend since mid-March this year.

Our analysis of Hong Kong’s liquidity stock data – which encompasses both the monetary base and the net foreign asset position of the Hong Kong banking system – suggests that HKD capital inflows have resumed since March.

Our total liquidity measure rose to HKD 1,857bn at end-May, implying capital inflows of HKD 151bn in the three months to May, offsetting the HKD 107bn of outflows in the first two months of 2014.

This magnitude of inflow was last reached at end-2012 and early 2013 when the HKMA last intervened.

Indeed, the inflow data is lagged and does not reflect recent flows, but capital inflows likely continued in June and early July given the broader trend of inflows to Asia.