The scariest hour in FX keeping HK peg defenders busy

The early part of the Asian trading day – when currency flash crashes tend to happen – seems to be when intervention happens too.

All five instances the Hong Kong Monetary Authority has recently bought the local currency to keep it from falling below the weak end of its trading band have been around 5 a.m. to 6 a.m. local time.

A lack of market liquidity – blamed for extreme moves seen in recent years in the yen, pound, euro and Swiss franc – is the issue here too. After New York traders have gone home and before Asia is fully open, it’s easier for large sell orders to push the HKMA into action, said Alan Yip, a senior foreign- exchange strategist at Bank of East Asia Ltd.

This was the case again yesterday, when Hong Kong’s de facto central bank bought HKD3.54 billion (USD451 million) of local currency just after 5 a.m. local time. The city’s currency then rose as much as 0.06 percent, the most since January, aided by a dovish Federal Reserve damping hopes for interest-rate hikes. The Hong Kong dollar pared the gain to 0.03 percent at HKD7.8479 a dollar as of 5:04 p.m.

The Hong Kong dollar has fallen to the weak end of the trading band at HKD7.85 repeatedly this month as its wide interest-rate discount to the U.S. dollar makes it profitable to short the city’s currency. That has prompted the HKMA to spend USD1.5 billion to defend the exchange-rate peg to the greenback over the past two weeks, driving up the local currency’s interbank borrowing costs.

While investors during U.S. hours are mostly interested in shorting the Hong Kong dollar, local banks sometimes buy it during the Asian workday for use in the city, said Ryan Lam, head of research at Shanghai Commercial Bank Ltd. That tendency can help cap the Hong Kong dollar weakness that prompts intervention. Tian Chen, Bloomberg