Record HK Peg Defense Boosts Liquidity to $58B

Investors are on the move to Hong Kong ahead of Ant Group Co.’s mega listing. Demand for the local dollar is prompting authorities to flood the banking system with extraordinary liquidity.

On Tuesday, the Hong Kong Monetary Authority sold HK$31.8 billion or $4.1 billion worth of local dollars. This was to curb the currency’s strength. Moreover, this will bring the interbank liquidity pool up to almost HK$450 billion on Thursday, and surpass the previous 2015 highs.

For 83 times this year, the de-facto central bank has stepped in. The move was to prevent the local currency from strengthening past its permitted trading range with the U.S. dollar.

The pace of interventions has picked up recently. October’s size will top HK$183 billion, which is by far, the largest on record.

An elevated liquidity pool means interbank rates will likely remain stable. That’s despite massive demand for cash during large stock sales. 

Suppressed borrowing costs will be beneficial to local businesses that have struggled due to last year’s protests in the city. Moreover, due to the impact of the COVID-19 pandemic on the economy.

iBonds: Hong Kong Government’s Inflation-linked Retail Bonds

Ant’s initial public offering (IPO), month-end bank regulatory checks and demand for iBonds helped increase local currency demand. This was stated by Carie Li, an economist at OCBC Wing Hang Bank. 

She said this situation will likely ease up once Ant’s IPO finishes in early November. By then, some capital may leave Hong Kong, allowing the HK dollar to move away from its strong end. That’s to trade at around 7.75-7.76 per dollar, she said.

The aggregate balance, however, could still have room to rise further in the coming months. That is, given the local dollar’s interest rate premium over the greenback. And with further listings by Chinese firms in the pipeline, the economist added.

As of Tuesday, the one-month HK dollar lending rate, Hibor, was at 0.41571%, close to a multiyear low. As of 11:02 a.m. Wednesday, the Hong Kong dollar was little changed at 7.75 per USD. 

Meanwhile in other forex news, the dollar was up on Wednesday morning in Asia. However, investors are avoiding big moves and risks ahead of the U.S. presidential election on Nov. 3.

In Europe, reports said France could reintroduce a national lockdown to curb the spread of COVID-19. This news sent the Euro tumbling against the dollar.