The Hong Kong Monetary Authority bought a total of $6.5 billion in defense of the local dollar’s peg to the greenback in the past week, a move that will drain about 30 percent of the aggregate balance of liquidity by Friday.

The de facto central bank has mopped up HK$51.3 billion ($6.5 billion), helping drive the city’s three-month borrowing cost to its highest level in almost a decade. The Hong Kong dollar rebounded as much as 0.07 percent on Thursday, the most in three months.

If the HKMA keeps the average pace of its intervention, the aggregate balance will be drained in about three weeks, Credit Agricole CIB strategist Gary Yau wrote in a note Wednesday. The balance will fall to HK$128.5 billion on Friday, compared with the pre-intervention level of HK$180 billion.

"We are somewhat surprised by the size of outflows so far and, more importantly, they are both consistently large and also increasing," Yau said. "The pattern and size of HKMA operations so far suggest that the aggregate balance will be down to low levels fairly soon, at which point the gap between U.S. rates and H.K. rates should reduce sizeably in our view."

The HKMA’s purchase of the Hong Kong dollar has been smooth and sound, and the size of the outflows isn’t too big, HKMA Deputy Chief Executive Howard Lee said in a press briefing Thursday. The de facto central bank doesn’t see large-scale shorting of the currency, and the slowly climbing interbank rates will continue to rise, he said.

The Hong Kong dollar was up 0.03% at HK$7.8473 against the greenback as of 11:25 a.m. local time. The three-month interbank rate -- known as Hibor -- jumped for a fifth day, climbing to the highest level since December 2008 at 1.34 percent.

The HKMA will likely reduce the amount of purchases next week as short positions on the Hong Kong dollar decline, said Carie Li, an economist at OCBC Wing Hang Bank in Hong Kong.

Source:
courtesy of BLOOMBERG

by Bloomberg News

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