HONG KONG (Reuters) - The Hong Kong dollar extended its slide to a fresh 33-year trough on Friday, a day after the city’s de facto central bank said it may not intervene until the currency peg touches the floor of its trading band.
The currency hit 7.8440 per U.S. dollar, inching closer to the weak end of the 7.75-7.85 per dollar HKD=D3 band under Hong Kong's linked exchange rate system. But the currency came off lows to trade at 7.8388 per U.S. dollar by 0841 GMT.
The 7.8440 level was its weakest since 1984, a milestone the HK dollar has plumbed for six straight sessions.
The currency has been weakening since November alongside a rise in U.S. interest rates, which has widened the gap between local and U.S. yields.
The peg was put in place in 1983 and the current trading band was set in 2005. The system requires Hong Kong’s interest rates to closely mirror those in the United States and for the Hong Kong Monetary Authority (HKMA), the country’s de facto central bank, to intervene to defend both ends of the band.
Most market participants do not see this bout of weakness as a threat to the peg, unlike instances in the past.
“The slide ... while unusual shows the currency board operating as designed,” Capital Economics said in a note.
“The fact that FX reserves are rising over this period of currency weakness should provide additional reassurance that the peg isn’t under threat.”
Traders and analysts have been expecting the HKMA to intervene by issuing additional bills to soak up the excess cash that has depressed both local interbank rates and the currency, as it did between August and November last year.
But the HKMA has so far not intervened. Rather, Norman Chan, the head of the HKMA, said on Thursday the central bank had no immediate plans to issue additional exchange fund (EF) bills, possibly not until it hits the trading band limit.
While the currency steadied after hitting fresh lows on Friday, analysts and traders speculated on the reasons why the HKMA had not yet announced any sale of bills.
“I think they are probably worried that they will be seen as providing some kind of a sure bet because when we hit the barrier, we know what will happen,” said Cliff Tan, east Asian head of global markets research at Bank of Tokyo-Mitsubishi UFJ in Hong Kong.
“It’s better for them to have a little bit of uncertainty in the approach up to 7.85,” he said, adding that it was probably better for the HKMA to do sporadic bill sales rather than have the market assume they will automatically step in.
While local money market interest rates broadly follow U.S. counterparts, they have diverged noticeably in recent months as the United States raised interest rates while Hong Kong remains awash in ample money market liquidity, thanks to inflows from Chinese investors and overseas into its domestic markets.
Chan has said that he sees no need for market participants to be concerned about a flow of capital away from the Hong Kong dollar to the U.S. dollar.
He said the city had more than HK$4 trillion ($510.15 billion) in assets that it could use in any intervention to strengthen the currency, should it hit the 7.85 level.
Hong Kong’s pegged currency system, one of the last in the world, has occasionally come under speculative attack by global hedge funds who have bet the city would abandon its link to the U.S. dollar as it strengthened links with China.
“They (HKMA) expanded EF bill issuance last year between August and October. They have realized that the impact of that policy is temporary anyway, it stabilized the USD-HKD but here we are again, with Hong Kong dollar continuing to weaken and the rate differentials continuing to widen,” said Mirza Baig, head of FX and rates strategy at BNP Paribas in Singapore.
“So maybe the assessment is that we let the markets decide where interest rates should go and we just police the band, which is our main policy tool anyway.”
Editing by Vidya Ranganathan and Himani Sarkar