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Hong Kong dollar jumps against US counterpart

The Hong Kong dollar jumped more than a cent against its US counterpart in minutes on Wednesday after the city’s de facto central bank fired a warning shot across the bows of those betting on rapid further weakening.

The currency, tightly pegged to the US dollar, has been steadily slipping this year, prompting speculation among analysts and investors as to how the Hong Kong Monetary Authority would respond even before the Hong Kong dollar reached the limit of its HK$7.75 to HK$7.85 trading range.

On Wednesday, the dollar reached HK$7.8278, leaving it just shy of the decade-high of HK$7.8295 it touched in the China-inspired market turmoil of January 2016.

But the exchange rate then fell sharply to HK$7.812 in less than 30 minutes after the HKMA said it would sell HK$40bn in additional exchange fund bills — a move that will in effect help mop up the excess cash in the banking system that has been keeping local interest rates low and also weighing on the currency.

While the HKMA said the debt sales were designed to meet rising demand from banks, and that the drop in the currency was “not a concern,” analysts said the move acted as a warning shot.

“The reason for the move is the HKMA signalling that they do want to withdraw liquidity,” said Raymond Yeung, chief economist for greater China at ANZ.

While Hong Kong’s dollar peg has obliged the HKMA to follow the US Federal Reserve and raise interest rates, the city’s banks have not felt the need to follow suit because of the high amounts of cash in the system following years of ultra-loose monetary policy.

The result has been a widening gap between US money market rates and their Hong Kong equivalents. On Monday, benchmark three-month US Libor rates offered 1.32 per cent and Hong Kong, just 0.75 per cent — the widest gap between the two since the days following the collapse of Lehman Brothers in 2008.

The upper, or weaker, side of the Hong Kong dollar’s trading band has not been reached in more than a decade and trader jitters surrounding the currency’s accelerated softening in recent days probably exacerbated Wednesday’s move, analysts said.

“Hong Kong-US dollar spot has not historically traded near the HK$7.85 end so there is a lot of uncertainty and speculation in the market as to what could happen and that’s one reason market moves may be sharper than normal,” said Gary Yau, emerging markets economist at Crédit Agricole in Hong Kong.

The HKMA stopped issuing additional exchange bills a year ago, allowing liquidity to build up as the weakening of the renminbi, particularly towards year-end, worried traders and investors in the city which is home to the largest offshore deposits of the Chinese currency. Mr Yeung said that in that light, the HKMA’s resumption of the bill programme could also be seen as a signal of normalising conditions as the renminbi has stabilised this year.

“For the HKMA it is two birds with one stone, effectively,” he added.