(22 Aug 2018 – Hong Kong) The Hong Kong Dollar (HKD) was defended for the third time this August by Hong Kong Monetary Authority (HKMA) intervention as US-China trade talks concluded with minimal progress achieved.
The intervention that will result in a withdrawal of banking liquidity to US$11.6 billion, comes as the US and Chinese officials ended two days of trade talks with no breakthrough, weighing on the RMB and HKD. The Hong Kong dollar was trading at 7.8499 against the USD on Friday, close to the lower limit of its permitted trading range. Hong Kong’s bill for defending city’s currency since April stands at HK$52.9 billion. The weaker US dollar and an easing in emerging markets tensions helped most commodities close with small gains, especially on Friday.
Hawkish comments in the minutes of the US Federal Reserve’s last policy meeting released earlier this week also fuelled expectations for tighter US monetary policy next month, which in turn is boosting the outlook for the US dollar against the Hong Kong dollar. Under the city’s linked exchange rate system, the HKMA is obligated to maintain the USD/HKD in a trading range between 7.75 to 7.85. Li Bo, an official at the People’s Bank of China reiterated earlier this week that China would not pursue competitive currency devaluation and would not use its currency as a weapon to deal with trade frictions. Li’s comments came after US President Donald Trump accused China of manipulating its currency. Separately China's central bank has given itself greater leeway to determine the RMB exchange rate, reflecting Beijing's concerns that the currency could fall rapidly as economic growth slows and the US escalates its trade war with the world's second-largest economy. The People's Bank of China announced that it was reintroducing a “counter-cyclical factor” to guard against what Chinese authorities have sometimes criticised as irrational market moves. The PBoC said it had begun “actively adjusting” the counter-cyclical factor earlier this month. “Due to factors including dollar strength and trade friction, the foreign exchange market has experienced some procyclical behaviour,” it said, adding that it had acted in order to “moderately hedge” the renminbi's recent moves. 'The foreign exchange market has experienced some procyclical behaviour'
Westpac Asia head of macro strategy Frances Cheung stated that while the HKMA would prefer to see an increase in Hong Kong dollar market rates, there would be a potential for the rates to overshoot and leading to a rapid adjustment of asset prices and capital outflows. “Risk is still to the upside for Hong Kong dollar rates, upon potentially further drainage of liquidity via currency intervention and the prospects for prime rate hikes,” Cheung said. Pressure is mounting for the city’s commercial banks to raise prime rates given that the HKMA is expected to raise benchmark rates in lock step with the Fed to maintain Hong Kong’s currency peg to the US dollar. The HKMA has been active in financial markets, recently disciplining Shanghai Commercial Bank (SCB) with a HKD5 million fine imposed in an effort to take tangible action on anti-money laundering and counter-terrorist financing, which should further strengthen the compliance culture in the Hong Kong banking sector. The incident highlights the potential financial crime and compliance risks faced by Hong Kong banks as a result of the territory's role as an international financial hub and its integration with the Chinese financial system.