HK spends USD1.2b defending currency overnight

Hong Kong intervened to defend its currency peg for a second day after the city’s dollar fell to the weak end of its trading band.

The Hong Kong Monetary Authority bought HKD9.5 billion (USD1.2 billion) of local dollars overnight, the third-biggest intervention since the defense began last month. The HKMA mopped up HKD1.57 billion on Wednesday. Lower rates than the U.S. have made the Hong Kong dollar an attractive target for shorting.

The de facto central bank has now spent $7.95 billion protecting its currency system, which has the effect of tightening liquidity in a city that’s grown fat on ultra-low borrowing costs. Hong Kong, which imports U.S. monetary policy, is facing the prospect of significantly higher rates for the first time since the financial crisis.

The three-month borrowing rate is 1.75 percent, near the highest since December 2008, and up from 0.8 percent a year ago. The Hong Kong dollar was little changed at HK$7.8498 per greenback at 3 p.m. local time.

“The HKMA may need to mop up more liquidity and push the aggregate balance toward HK$100 billion this week,” said Carie Li, a Hong Kong-based economist at OCBC Wing Hang Bank Ltd. “But the Hong Kong dollar will rebound starting next week, as funding needs to increase at month-end. Liquidity will tighten further in June due to an expected interest rate hike in the U.S. and potential funding demand fueled by Xiaomi and China Tower IPOs.”

Li said Hong Kong lenders will lift deposit rates as liquidity conditions tighten. “Banks are likely to increase the prime rate around mid-year, which will hurt property market sentiment, especially for mortgage borrowers. The home market may see a correction and slower growth this year.”

While rising short-term funding costs have prompted banks to offer deposit rates of as much as 3 percent, there’s been little impact so far on the city’s housing market as lenders hold off raising the prime rate – which caps mortgages. Sun Hung Kai Properties Ltd. spent a record $3.2 billion buying a land plot at the city’s old airport site this week, signaling confidence demand will hold up in what’s already the world’s least affordable real estate market. Bloomberg