Hong Kong near to buying local dollars for first time since 2005

The Hong Kong Monetary Authority is on the verge of mopping up local dollars for the first time since a trading band was introduced in May 2005, as the currency slides toward HKD7.85 per greenback. 

The HKMA’s move would tighten liquidity and raise rates in the city, ending an era of ultra-cheap money that made Hong Kong the least affordable housing market in the world and sent the stock market to a record high. The Hong Kong dollar has been on a downtrend over the past year as ample liquidity prevented local rates from catching up with those in the U.S., prompting traders to borrow the local currency to buy the dollar. 

Under the currency peg, the rates have to eventually converge. That started to happen last year when the HKMA sold additional debt, but the effect was temporary. By shrinking the monetary base, direct purchases of the Hong Kong dollar should exert a much larger upward pressure on rates. That would be a drastic change for Hong Kong, which has never had to defend the weak end of its currency band thanks to strong inflows.

Since the global financial crisis in 2008, about USD130 billion to $140 billion of funds have entered Hong Kong, with inflows intensifying over the past few months, Paul Chan, Hong Kong’s financial secretary, told reporters on March 5. Bloomberg