Hong Kong plans to spend $6.4 billion to defend currency peg

Bloomberg

This round of currency intervention in Hong Kong is far from over.
That’s according to analysts, who’re watching the interplay between the amount of money in the city’s financial system and local borrowing costs. Shorting the Hong Kong dollar will remain profitable until the latter starts to go up sharply, and the monetary authority will spend at least another HK$50 billion ($6.4 billion) defending the peg before that happens, according to Bank of America Merrill Lynch and OCBC Wing Hang Bank Ltd.
Hong Kong’s currency has hit the weak end of its trading band repeatedly over the past week, spurring intervention that’s cost nearly $700 million.
At the heart of the analysts’ calculus is a call on how low the city’s aggregate balance can go before banks start feeling a funding squeeze. That’s hard to judge given the liquidity measure has swung between HK$426 billion and HK$71 billion in the past decade.
Right now, it sits at just over HK$70 billion, low relative to recent history, but the gap between Hong Kong and US borrowing costs remains wide. So there’s little to stop traders selling the city’s dollar and parking the proceeds in the higher-yielding US currency.
“The pressures will continue for money to flow out from the Hong Kong dollar, as long as the rate spread exists,” said Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets Hong Kong Ltd. Local borrowing costs will become more responsive to intervention when the aggregate balance slides to HK$20 billion-HK$30 billion, he added.
Any spike in interbank rates as a result of the currency operations risks intensifying pressure on the world’s most expensive property market and weighing on the city’s economy. But officials do have a tool to mitigate this — they’ve issued HK$1 trillion of exchange fund bills that, if allowed to mature, would add money back into the system. And the city’s $434.5 billion of foreign-exchange reserves are more than enough to handle the intervention that analysts expect.
The Hong Kong dollar was little changed at HK$7.8497 to the greenback as of 4:41 p.m. local time. The one-month Hibor climbed 3 basis points to 1.55 percent on Friday, extending its advance over the past seven days to 22 basis points.