HKD: Back under pressure - TDS

Mitul Kotecha , Senior Emerging Markets Strategist at TD Securities, points out that HKD pressure led HKMA to intervene twice this week to the tune of HKD 16.8bn (USD 2.1bn) to protect USDHKD 7.85  and the last such intervention took place in May.

Key Quotes

“Liquidity drain pushes funding costs higher, with 1m HIBOR jumping most since June 22. Spread between 1m LIBOR-HIBOR rose to close to 80bps this week.”

“HK’s aggregate balance to fall to HKD 92.6bn today, the first drop below HKD 100bn since 2008. Liquidity drain to help put a floor under HKD rates, alleviating some HKD pressure.”

“HKMA may also sell Exchange Fund Bills, similar to August to October 2017. Such action would help to push HIBOR higher. However, the HKMA would likely issue bills only when there is a shift in banks appetite for such bills.”

“USDHKD carry likely remains attractive for investors and higher US rates in the months ahead suggest little chance of any let up in pressure on the currency pair. Further intervention is likely in the day and weeks ahead.”

“There is little sign of nervousness of any break in the HKD peg, with implied USDHKD volatility not picking up significantly. We do not think that the peg is in any danger despite likely ongoing pressure.”