April 19, 2018 / 5:12 AM / a year ago

Hong Kong central bank confident in currency peg even as interbank rate jumps

HONG KONG (Reuters) - Hong Kong’s central bank said on Thursday it has confidence in the financial hub’s more than three-decade old peg to the U.S. dollar, even as it continued to intervene to prop up the currency and as interbank rates jumped to a 10-year high.

FILE PHOTO: A Hong Kong 10 dollar banknote, a U.S. 100 dollar banknote, and Chinese 100 Yuan banknotes are seen in this picture illustration, in Beijing, China, January 21, 2016. REUTERS/Jason Lee/File Photo

The Hong Kong Monetary Authority (HKMA) said its recent operations in the banking system have been smooth and in line with expectations after intervening in U.S. trade as the Hong Kong dollar repeatedly hit the weak end of its trading band.

“We see that the operation in the market has been smooth and orderly, and the market’s confidence in the ability of the HKMA to maintain the stability of the Hong Kong dollar is very strong and also very strong confidence in the Linked Exchange Rate System,” said Howard Lee, deputy chief executive of the HKMA, referring to the city’s currency peg.

“The amount and the extent of outflows would depend very much on market sentiment and also the market view,” he added.

Lee said he had not seen huge short-selling of Hong Kong dollars.

The HKMA has now mopped up HK$51.33 billion of Hong Kong dollars from the foreign exchange market since last Thursday in its first intervention since 2015.

The Hong Kong dollar is pegged at 7.8 to the U.S. dollar but can trade between 7.75 and 7.85. Under the currency peg, the HKMA is obliged to intervene when the Hong Kong dollar hits 7.75 or 7.85 to keep the band intact.

The currency traded at 7.8475 against the U.S. dollar at 0343 GMT while a key lending rate that could push up borrowing costs climbed to new highs.

The three-month interbank rate in Hong Kong HIHKD3MD=, which influences mortgage rates, hit its highest since 2008, edging up to 1.33661 percent.


Thomas Shik, chief economist at Hang Seng Bank, said there was no need for concern as the economy was strong and there was ample liquidity in the system, while the property market remains robust.

“The interest rate is trending up and home buyers will have to assess the risk. Ninety percent of mortgages are now linked to HIBOR and the HIBOR has risen gradually in the past 2-3 years,” he said. “However, the property market is still strong with buyers still having confidence in buying a home amid a low unemployment rate and strong economy.”

As the former British colony pegs its currency to the dollar, its money market rates should mirror those of its U.S. counterpart, but the gap has now widened to more than 133 basis points since the Federal Reserve started raising interest rates from ultra-low levels adopted during the 2008 financial crisis.

Hong Kong’s markets have remained flush with excess cash, keeping a lid on Hong Kong dollar interest rates.

Most market participants do not see this bout of weakness as a threat to the currency peg even though ample liquidity, thanks to inflows from Chinese investors and overseas into Hong Kong’s domestic markets, is anchoring short-term interest rates and exerting depreciation pressure on the currency.

Hong Kong authorities have maintained the peg even though that means reconciling sometimes divergent monetary policy-making pressures in the United States with the economic dynamics in mainland China.

The financial hub has more than $400 billion in reserves to defend the Hong Kong dollar.

Hong Kong has raised its base rate charged through its overnight discount window twice in the past few months in lockstep with the Fed. The base rate now stands at 2.00 percent.

The city’s major banks have left their prime rates unchanged, although the HKMA has said it expects them to raise rates gradually.

Writing by Anne Marie Roantree; Editing by Sam Holmes and Jacqueline Wong

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