Hong Kong scrambles to defend HK$ again

Hong Kong came to defense of its embattled currency for the second time in four days Monday, selling HK$1.25 billion to deter the currency’s further appreciation.

The Hong Kong Monetary Authority sold Hong Kong dollars after it hit HK$7.75 per U.S. dollar in Hong Kong and New York, the upper limit of its three decades old peg to the U.S. dollar. The central bank fixed the currency in 1983, and in 2005 committed to keep the exchange rate between HK$7.75 and HK$7.85.

The central bank bought a combined HK$1.25 billion at a rate of HK$7.75 per U.S. dollar in Hong Kong and New York on Monday. This comes after a HK$603 million intervention on Oct. 19 when HKMA stepped into the market for the first time since 2009.

HKMA said latest intervention will result in a corresponding expansion in the banking system’s aggregate balance to HK$163 billion on Oct. 25. The pressure on the peg arose from capital inflows into the region.

Hong Kong is cash flush, having US$301.2 billion in foreign-exchange reserves as of the end of September. This amount is some eight times the currency in circulation. The holdings grew 8.5% in the past year.

“There could be more intervention,” said Stella Lee, president of Success Futures & Foreign Exchange Ltd. in Hong Kong.

“They will have no choice but to keep intervening,” believes Irene Cheung, a currency strategist in Singapore at Australia & New Zealand Banking Group. “The Hong Kong dollar’s strength reflects the capital flows we see into most Asian currencies.”

When the Hong Kong dollar reaches the strong end of the permitted trading range, HKMA offers to buy U.S. dollars to prevent further appreciation under its currency board system.