Report: Hong Kong is likely to tighten liquidity

Hong Kong is likely to take steps to tighten liquidity, according to a Bloomberg survey of 19 analysts during Mar 2-6.

A total of 15 analysts said the Hong Kong Monetary Authority (HKMA) will offer extra Exchange Fund Bills (EFBs) this year, though not all of these respondents agreed the weakened currency would be a factor in the sales, a Bloomberg report says.

In addition, 12 analysts were cited as saying in the report that the exchange rate will go below the weak end of the HK$7.75-7.85 band for the first time since it was imposed in 2005.

The Hong Kong dollar recently weakened to its lowest level in more than three decades after the implementation of the peg, slipping to 7.8335 per US dollar on Thursday.

The gap between Libor—the premium of the US interbank rate—and Hibor, Hong Kong’s equivalent is currently at its widest since 2008, resulting in increasingly rampant carry trade in which dealers use the low Hibor to borrow and sell the Hong Kong currency to buy US dollars. This is expected to push the Hong Kong dollar to drop further.

The HKMA is obliged to prevent the currency from breaching either side of a trading band between 7.75 and 7.85 per US dollar under the linked exchange rate system (LERS).

According to local media reports, an HKMA spokesperson was quoted as saying that it had not conducted any market operations within the convertibility zone on Monday while the recent easing of the Hong Kong dollar against the US dollar was in line with the design of the LERS and should not cause any particular concern.

While the HKMA can sell EFBs regarless of currency moves, its sales EFBs could create the impression that the HKMA is in an attempt to push up Hibor and hence the exchange rate, says the Bloomberg report, adding that many analysts believe the de facto central bank prefers bill sales over buying the local currency when the exchange rate hits HK$7.85.