Hong Kong's aggregate balance expected to hold above $50b in end-September

The HKMA drained further liquidity after buying $14.57b last week.

The aggressive currency purchases made by the Hong Kong Monetary Authority (HKMA) in order to defend the currency peg system is expected to further push down the aggregate balance to around $50b in September, according to OCBC Treasury Research. 

The aggregate balance fell to $92.754 in August 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 bought another $14.57b by end-August, pushing the aggregate balance to fall by 30% to $76.35b. The month-end effect along with higher HIBOR push the HKD to a short-lived rally, enabling the HKMA to take a breather.

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

However, Chinese group buying website’s Meituan-Dianping’s IPO may once prompt short HKD traders to tread more carefully in fears of liquidity withdrawals.

Investor caution along with the expectations of a wider US-HK yield differential may push the USDHKD to touch 7.85 band again and prompt liquidity withdrawal on the back of carry trade activities.

“As such, we hold onto our view that aggregate balance to hold above $50b by end-Sep, which is much higher than the average of $4.5b during 1997-2007. This indicates little incentive for banks with large deposit base to lift prime rate in Sep,” the firm said in a report.