Hong Kong makes second intervention in 24 hours to defend local currency peg as Fed rate policy threatens more capital flight

The Hong Kong Monetary Authority (HKMA) intervened in the foreign-exchange market twice within 24 hours to defend the local currency peg as the market braced for more capital flight ahead of potentially US rate rise in four decades at the end of the month.

The authority on Friday morning bought HK$5.32 billion and sold US$678 million, according to a statement. It bought HK$12.796 billion and sold US$1.6 billion on Thursday to support the peg after the local currency hit the weaker end of its HK$7.75 to HK$7.85 band. The two moves came after a three-week pause.

The HKMA, the city’s de facto central bank, has stepped into the market 16 times this year, buying a total of HK$122.395 billion and selling US$15.59 billion amid persistent capital outflows. This has now surpassed the size of its recent intervention, for different reasons: HK$103.48 billion in 2018 and HK$22.13 billion in 2019.

“US interest-rate futures show that the market now widely expects that the Federal Reserve will have a full percentage-point rate rise at the coming meeting on July 26 and 27,” said Jasper Lo, an independent forex analyst. US consumer prices rose 9.1 per cent in June from a year earlier, a four-decade high.

A one-percentage point rate rise will be the most aggressive since August 1983, when the Fed lifted its key rate by 1.12 percentage points.

“The expected aggressive rate rise has led to capital flowing out of the Hong Kong dollar and into the US dollar to enjoy the higher yield,” Lo said. “We can expect the HKMA will need to intervene more over the next two weeks to defend the peg.”