HKMA buys HK dollar for first time since 2023 to defend peg

HKMA buys HK dollar for first time since 2023 to defend peg

The Hong Kong Monetary Authority (HKMA) has taken an unprecedented move by purchasing HKD for the first time since 2023 to defend the city's currency peg. This intervention comes amidst a period of unprecedented volatility in Hong Kong's interbank offered rates (HIBOR), which have seen overnight rates plunge from 4.50% to near zero [1].

The HKMA's action is a direct response to the HKD's recent strength, which pushed the currency to its strong-side limit of HK$7.75 per USD. To maintain the currency within the Linked Exchange Rate System (LERS) band of HK$7.75-7.85 per USD, the HKMA was compelled to sell HK$129 billion in exchange for USD. This massive intervention injected a significant amount of HKD into the banking system, leading to a collapse in interbank rates from over 4% to near zero [2].

The sudden influx of HKD in the banking system created a massive interest rate differential with USD rates. The one-month SOFR-HIBOR spread expanded beyond 370 basis points, making it highly profitable to borrow cheap HKD and invest in higher-yielding USD assets. This phenomenon, known as a carry trade, has now reversed the original problem, pushing the HKD towards the weak side of its trading band [2].

The HKMA's intervention underscores the complex interplay between currency intervention and banking system liquidity. The move is part of the broader efforts to stabilize the currency and maintain Hong Kong's position as a global financial hub. However, the long-term implications of these actions remain to be seen, with analysts predicting a gradual normalization of HIBOR rates as the currency stabilizes within its permitted range [2].

References:
[1] https://www.cryptopolitan.com/nano-labs-hkd-rmb-stablecoin-license/
[2] https://www.ig.com/en/news-and-trade-ideas/HIBOR-plunged-to-zero-250625