Two weeks after HKMA’s intervention managed to lift the HKD off its peg band’s lower limit, the currency tumbled back to its weakest level in 30 years overnight.
Having hit the lower end of the peg band, the HKD is popping modestly following a statement from Hong Kong Monetary Authority Chief Executive Norman Chan, noting that local interest rates should gradually rise along with their USD counterparts under the linked exchange rate system as the U.S. is in an interest rate hike cycle and market is expected a U.S. rate rise in June.
Additionally, Chan admitted that the HKD-USD interest rate gap attracts carry trade activities, which resulted in the weakening of the Hong Kong currency. Chan noted that as capital flowed out of HKD, aggregate balance shrank and HKD market liquidity should tightened gradually, providing a more “conducive” environment for HKD interest rate normalization.
And rather notably, the HKD-USD rate-spread has narrowed dramatically (as HIBOR has risen), removing some of the enticement to enter the carry trade (but remaining a solid 75-80bps for now)…
Finally, presumably on the back of an ongoing rise in local rates HKMA’s Chan reminded public to “manage risks prudently to prepare for possible volatility in local interest rates and asset markets..”
And Hong Kong stocks (and China tech stocks) are headed for their worst loss in a month after the Federal Reserve signaled it will continue to tighten monetary policy and as investors awaited the outcome of U.S.-China talks.
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