Key Information

inSight
Speeches
Speeches by Speaker
Norman T.L. Chan
Peter Pang
Eddie Yue
Arthur Yuen
Zeti Akhtar Aziz
Raymond Li
Edmond Lau
Esmond Lee
Meena Datwani
Vincent W.S. Lee
James Lau
Joseph Yam
Y K Choi
William Ryback
David Carse
Tony Latter
Andrew Sheng
Hans Genberg
Simon Topping
Michael Taylor
The Honourable Donald Tsang
Chen Yuan
Dai Xianglong
Don Brash
Jaime Caruana
Andrew Crockett
Mario Draghi
David Eldon
Stanley Fischer
Timothy F. Geithner
Stephen Grenville
Kenneth G. Lay
William McDonough
Ernest Patrikis
Glenn Stevens
Jean-Claude Trichet
Tarisa Watanagase
Zeti Akhtar Aziz
Carmen Chu
Alan Au
Press Releases
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
Press Releases by Category
Bogus Voice Message Phone Calls
Banking in Hong Kong
Fraudulent Websites, E-mails and Telephone System, and other fraud cases
Granting of Banking Licences
Exchange Fund
Table of Multiples of Notes and Payments for Allotted Amount under non-competitive tender
Table of Multiples of Notes and Payments of Application Amount under non-competitive tender
Tender of Exchange Fund Bills and Notes
Tender Results of Exchange Fund Bills and Notes
Tentative Issuance Schedule for Exchange Fund Bills and Notes
Appointments and Departures
HKMA Pay Review
HKMA Publications
Speeches
The Hong Kong Mortgage Corporation
Hong Kong Note Printing Limited
Hong Kong Institute for Monetary Research
Exchange Fund Investment Limited
Others
Hong Kong Financial Infrastructure
International Relations
Investment Products Related to Lehman Brothers
Monetary Policy
Notes and Coins
Renminbi business
Credit Card Lending Survey
Monetary Statistics
Residential Mortgage Survey
Year 2000
Others
Guidelines and Circulars
Guidelines
Circulars
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
515.5995

insight

Recent Movements of Hong Kong Dollar Interbank and Exchange Rates

(Translation)

Recently the Hong Kong dollar (HKD) exchange rate and interbank rates saw noticeable movements.  There are a few underlying reasons, including the structure of the HKD market and some capital market activities.  I would like to share some analyses in this regard.

Under the Linked Exchange Rate System (LERS), the HKD interbank rates usually track their US dollar (USD) counterparts, but they may also be influenced by changes in supply and demand of HKD funding in the local market, including some seasonal factors, large initial public offerings (IPOs), etc.  This is what we have seen in the past few weeks.  One might wonder why these movements are becoming more frequent and pronounced, given that these changes in supply and demand were not something new.  Let me briefly explain.

If we take a look at past data, volatility in HKD interbank rates is quite common indeed.  When there were large IPOs in the past few years, HKD interbank rates usually rose as a result of transient surge in demand for HKD funding.  For example, the highly popular IPO of China Literature in 2017 locked up several hundred billion dollars during the IPO period.  On that occasion, the overnight interbank rate rose by more than two percentage points from the pre-IPO level.  So an increase in interbank rates in response to different market factors should be reasonably expected.   It is true that the reduction of the Aggregate Balance from over HK$200 billion a couple of years ago to the current level of HK$54 billion has probably made the HKD interbank rates more sensitive to changes in supply and demand of HKD funding.  But that does not mean that the current Aggregate Balance level is insufficient for meeting the settlement needs in the interbank market.  It is just that banks now need to be more active in managing their day-to-day funding position so as to ensure effective deployment of liquidity for themselves and efficient circulation of liquidity in the banking system.  In the past few months the HKMA has been urging banks to strengthen their liquidity management arrangements, and we are seeing banks getting prepared earlier for events like quarter-ends and IPOs.   This is a normal adjustment process.

Movements in interbank rates caused by changes in funding demand can also affect the HKD exchange rate.  For example, recent increases in HKD interbank rates have made carry trades of selling HKD for USD no longer profitable, so these once active carry trades have become much more subdued.  When other HKD demands arose, the HKD exchange rate strengthened from 7.84 levels in early June to 7.78-7.80 a couple of weeks ago.  As a result, some investors who had previously held short HKD positions via forward and option contracts decided to square their positions.  In the past few days, the funding demand for a large IPO subsided, and the interbank rates began to ease and the HKD slightly softened to the current 7.82 level.  The interaction between HKD interbank rates and exchange rate actually illustrates the effective functioning of the LERS, and the public needs not be concerned by occasional volatility in the HKD interbank rates and exchange rate.  Our banking system remains robust and its deposit and liquidity levels continue to be stable.

Furthermore, should there be short-term liquidity tightness in the banking system due to large-scale capital market activities, banks can also make use of the HKMA’s liquidity support facilities.  They may pledge their Exchange Fund Bills and Notes to obtain overnight funding through the Discount Window, or conduct foreign exchange swap or term repo transactions with the HKMA to get HKD liquidity.

As an international financial centre, Hong Kong thrives on an active capital market with a variety of financial activities.  Being a freely exchanged currency, HKD plays an important role in supporting our financial market development.  The HKMA will continue to take appropriate measures to ensure effective operation of the HKD market in accordance with the LERS, and to ensure monetary and financial stability in Hong Kong.

 

Howard Lee
Deputy Chief Executive
Hong Kong Monetary Authority

15 July 2019

Last revision date: 15 July 2019
ABOUT THE HKMA
The HKMA
Tender Invitations
Careers@HKMA
Legislative Council Issues
Links
The HKMA Information Centre
KEY FUNCTIONS
Monetary Stability
Banking Stability
International Financial Centre
Exchange Fund
PUBLICATIONS & RESEARCH
Annual Report
Half-Yearly Monetary & Financial Stability Report
Quarterly Bulletin
HKMA Background Briefs
Reference Materials
Research
MARKET DATA & STATISTICS
CMU Bond Price Bulletin
Economic & Financial Data for Hong Kong
Monthly Statistical Bulletin
Monetary Statistics
KEY INFORMATION
Press Releases
Speeches
Guidelines & Circulars
Forthcoming Events
inSight
OTHER INFORMATION
Information in Other Languages (Bahasa Indonesia, हिन्दी, नेपाली, ਪੰਜਾਬੀ, Tagalog, ไทย, اردو)
Account Opening
Consumer Corner
Consumer Education Programme
Complaints about Banks
Complaints about SVF Licensees
Internet Banking
Fraudulent Bank Websites, Phishing E-mails and Similar Scams
Be Careful of Bogus Phone Calls and SMS Messages
Authenticate the Callers and Bank Hotline Numbers
Register of AIs & LROs
Register of Securities Staff of AIs
Register of SVF Licensees
Investment Products Related to Lehman Brothers
Photo Gallery