HKMA purchases $9.5b in HKD to defend flailing currency peg

The central bank has spent a total of $62.41b to protect its currency system.

Bloomberg reports that the Hong Kong Monetary Authority (HKMA) purchased $9.5b of local dollars overnight after the local currency plunged to the weak end of the trading band at $7.85.

The move represents the third largest intervention by HKMA since the defense began last month, with the central bank spending a total of $62.41b (USD7.95b) to defend its peg with greenback.

Also read: HKMA may offer extra Exchange Fund Bills to halt dollar decline

The HKD plunged to a record low after plummeting to trade at the weak end of the trading band or at $7.85 last April as the itnerest rate gap between the US dollar and the local currency widened even further. The decline represented the first breach since the range was imposed in 2005 to curb the inflow of funds into Hong Kong to bet on a stronger Chinese dollar.

Tightening liquidity is fueling worries of prime rate hike with analysts expecting an increase by Q4 which an also entail higher mortgage repayments for residents. In fact, one-month interbank rates have already grown from 0.22% in 2015 to 0.85% whilst major banks like HSBC and BOC have already scrapped fixed-rate mortgages plans as they have become too costly to maintain.

Also read: Dollar depreciation may trigger slowdown in housing market

“We should not expect that the ultra-low interest rate environment will continue unabated. We must carefully consider whether it is possible to cope with the increase in interest expense on loans, and we must also pay attention to the increase in interest rates to asset prices,” Financial Secretary Paul Chan noted in his blog.

A short-lived rally brought about by a greater number of fund raising activities in preparation for blockbuster IPOs includign Xiaomi and Ping An has buoyed the HKD beyond the 7.85 level last May 3.

Here’s more from Bloomberg: