Currency peg defense pushes aggregate balance down to $91b

The central bank is expected to make purchases that will drain liquidity further.

The aggressive purchases made by the Hong Kong Monetary Authority (HKMA) to defend the currency peg system has brought the city’s aggregate balance down to $91b as of August 27, according to OCBC Treasury Research.

The aggregate balance fell to $92.754 in August 23 which would mark the first time since 2008 that interbank liquidity breached the $100b mark. It then fell to $92.764 in August 24 and settled at $91.025b in August 27.

The HKMA has spent roughly $75b this year alone to boost the struggling HKD after another purchasing $1.766b last week in its latest effort to defend the local currency peg to the greenback.

Also read: Peg defense boosts interbank borrowing costs to two-month peak

OCBC Treasury Research expects more purchases to loom in the coming months, pushing interbank liquidity lower.

“Moving forward, in the absence of mega IPOs, ample front-end liquidity is expected to sustain and continually push USDHKD up to 7.85 in the coming month. As Fed is poised to raise rate in Sep, increasing speculation on a wider US-HK yield differential would further boost carry trade activities. As such, we expect to see more liquidity withdrawal ahead,” the firm said in a statement.

"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 an earlier 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.