Hong Kong bought local dollars to defend its peg to the greenback for the first time since November, as a slump in bank borrowing costs made shorting the city’s currency a popular trade.
(Bloomberg) — Hong Kong bought local dollars to defend its peg to the greenback for the first time since November, as a slump in bank borrowing costs made shorting the city’s currency a popular trade.
The Hong Kong Monetary Authority purchased HK$4.2 billion worth of local dollars. The operation will reduce the city’s aggregate balance, a gauge of interbank liquidity, potentially driving up local funding costs and squeezing the bearish trades.
Late last week, the Hong Kong dollar touched the weak end of its 7.75-7.85 trading band versus the greenback, increasing the likelihood of government intervention. A slump in the city’s interbank rates — close to their deepest ever discount to US counterparts — prompted hedge funds to borrow the currency cheaply and sell it against the higher-yielding US dollar.
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The HKMA frequently intervened to boost the local dollar from May to November, reducing the city’s aggregate balance to the lowest since 2020. While such a move would eventually support the currency, it can also act as a headwind for the local economy. Hong Kong’s growth contracted last year for the third time since 2019.
“The Hong Kong dollar weakening is likely to be short lived,” said Samuel Tse, economist at DBS Bank in Hong Kong. “When the demand for Hong Kong dollar assets returns amid China’s reopening, the local currency will strengthen again,” he said, forecasting it to trade at 7.78 by quarter-end.
Bill Ackman, the billionaire founder of hedge fund Pershing Square Capital Management LP, said in November he was betting against Hong Kong’s currency and its peg citing the city’s weak economy. Kyle Bass, the founder of Hayman Capital Management and George Soros have also wagered on a collapse of Hong Kong’s currency peg in the past.
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