Hong Kong intervenes to defend FX peg

Hong Kong's de-facto central bank spent more than a billion dollars propping up the city's currency, as it sought to defend a peg that has been strained by volatility in the greenback.

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The Hong Kong Monetary Authority (HKMA) took HK$9.42 billion ($1.2 billion) out of circulation after the exchange rate touched the weak end of its dollar peg, marking the first time it stepped in to offer support since May 2023. In earlier weeks, the monetary authority had injected liquidity into the financial system to rein in gains in the Hong Kong dollar as the US currency declined.

In addition to pushing the currency back into its permitted trading range of 7.75-7.85 per greenback, the HKMA's latest move will also make bearish bets more costly. It does this by draining liquidity from the financial system and driving up borrowing costs.

The intervention follows a rollercoaster ride for the Hong Kong dollar that has seen it swing between both ends of its trading range as authorities sought to protect the currency peg.

That volatility has intensified a debate about the sustainability of the regime, even though there are no signs that a change is imminent.

The HKMA is signalling that funding for carry trades is going to be more expensive and USD/HKD will not rise much further, said Rodrigo Catril, a currency strategist at National Australia Bank Ltd in Sydney. "For markets, the big question is: do you believe the peg will be protected? For now, authorities are showing that they are very much willing to defend it."