HKMA may offer extra Exchange Fund Bills to halt dollar decline

The currency plummeted to a thirty-year low at $7.83 level on Tuesday.

Bloomberg reports that de-facto central bank Hong Kong Monetary Authority is likely to offer Extra Exchange Fund Bills to halt the decline of the HKD against the US dollar as the local currency plunged to a thirty-year low at $7.83 on Tuesday, according to a survey it conducted with 19 analysts.

Extra bill sales may help slow the local dollar’s drop, but they pose a considerable risk to the monetary system since once the currency reaches the band limit, HKMA will be forced to buy HKD, and shrink the monetary base which will ultimately raise rates.

“HKMA will act preemptively before HKD hits the 7.85 level,” said Christy Tan, Singapore-based head of Asia markets strategy at National Australia Bank Ltd.

The Federal Open Market Committee (FOMC) convenes on March 22 to discuss the much anticipated Fed rate hike which may add more fuel to the fire and push the HKD to breach the $7.85 level at a quicker pace.

"HKMA may need to spend more to defend the peg system in this circumstance, as speculators may see this as an opportunity to test the peg,” Tan said.

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