26.06.2025 03:36
The Hong Kong Monetary Authority (HKMA) recently undertook a significant intervention in the foreign exchange market, spending HK$9.4 billion (approximately $1.2 billion USD) to defend the Hong Kong dollar's peg against the US dollar. This action became necessary after the Hong Kong dollar weakened, breaching the HK$7.85 per USD lower limit prescribed by the city's currency peg mechanism. The intervention directly impacts one of the world's most lucrative carry trades, where investors profit from the interest rate differential between the Hong Kong and US dollars.
This substantial injection of Hong Kong dollars into the market effectively counters the weakening trend. By purchasing the local currency, the HKMA has tightened liquidity within the banking system, consequently driving up interbank lending rates. These rates had previously hovered near zero since early May, fostering a low-cost environment that had fueled the aforementioned carry trades. The increased borrowing costs now make these trades considerably less appealing.
This intervention marks the HKMA's second significant foray into the foreign exchange market this year. Last month, the authority implemented a contrasting strategy, releasing Hong Kong dollars to counter the currency's unexpected strength. This action had the opposite effect, boosting liquidity and pushing interbank lending rates even lower, thereby creating a more favorable environment for carry traders. The HKMA's latest move represents a decisive shift in strategy, aimed at stabilizing the Hong Kong dollar and making speculative attacks less profitable.
The HKMA's actions will result in a decreased aggregate balance—a key banking metric—to HK$164 billion. This reduction contrasts sharply with the increase observed following the previous intervention. The timing of the HKMA's latest intervention is significant, coinciding with recent weakening of the US dollar, a factor that undoubtedly contributed to the pressure on the Hong Kong dollar peg. The last time such a substantial intervention was needed was in May 2023, highlighting the evolving challenges of maintaining the currency peg in a dynamic global financial landscape. Information for this report was gathered from internet sources.
