The weak-side CU under the Linked Exchange Rate System was triggered again

On the latest market operations, Howard Lee, Deputy Chief Executive of the HKMA, said, “The major reason for this round of the weak-side CU triggering is the significant widening of the interest rate gaps between the HKD and USD after the year-end, mainly because of the drop in banks’ funding demand, which led to a fall in HKD interbank interest rates.  The wide interest rate gaps attracted carry trade activities that sell HKD for USD, pushing the HKD towards the weak side as a result.”

“Due to abundant liquidity in the HKD market, weak demand for loans and a lack of large scale Initial Public Offerings (IPOs), coupled with the Fed raising the interest rates in September and December last year by a total of 50 basis points, which further pushed up the USD interest rates, the interest rate gaps between the HKD and USD continued to be wide.  In particular, the gap in 1-month tenor stayed at about 150 basis points in the recent month, while that of the overnight tenor was around 150 to 200 basis points.

If the large gaps between the HKD and USD interest rates remain, carry trade activities will likely keep the HKD weak in the near future.  It is not surprising for the weak-side CU to be triggered again.  The amount of outflows from April 2018 till now is only a small part of the inflows since 2008, which amounted to around HK$1 trillion.  The outflow of funds from HKD is a normal and inevitable process for the normalisation of the Hong Kong monetary environment.  As in the past, the HKMA stands ready to fulfil the commitment on the CU in accordance with the design and operations of the LERS, with a view to ensuring currency stability,” he added.