Practice of selling Hong Kong dollar ‘could re-emerge next month’ if US further raises interest rates: Paul Chan
- Finance chief also says selling of local currency amid US interest rate hikes does not mean a capital outflow
- He warns another rise looms with US Federal Reserve chairman Jerome Powell asserting stance to raise rates in bid to drive down inflation
An investment activity that has caused a deterioration of the Hong Kong dollar is petering out, but the so-called carry trade could re-emerge and put the local currency under pressure if the US further hikes interest rates next month, the finance chief has said.
Financial Secretary Paul Chan Mo-po also said Hong Kong dollar selling amid US interest rate increases did not mean an outflow of capital, even though the city’s monetary authority had intervened about 30 times this year to prop up the weakened local currency with more than HK$200 billion (US$25 billion) in purchases.
“In the first half of the year, the total deposits of authorised institutions in Hong Kong still rose slightly by 0.4 per cent, reflecting that the selling of the Hong Kong dollar is not equivalent to an outflow of capital, and will not affect the financial and currency stability of Hong Kong,” Chan said on his official blog on Sunday.
A carry trade is an investment strategy that involves borrowing one currency at a lower interest rate to buy another that provides a higher rate of return. Investors then collect higher interest rates on the currency bought.
As the Hong Kong dollar is pegged at a range of HK$7.75 to HK$7.85 to US$1, the Hong Kong Monetary Authority repeatedly intervened since May to defend the peg as investors borrowed or sold the local currency ahead of potential US rate rises.
Chan noted that the carry trade in Hong Kong had decreased in the past month.
But as US Federal Reserve chairman Jerome Powell on Friday asserted his stance to raise interest rates in a bid to drive down inflation, Chan said he believed Hong Kong had to be prepared for another drastic interest rate increase next month.
“His remarks deepened the market’s expectations that the Fed will continue to raise interest rates significantly and faster, including a further 75 basis point [or three-quarter of a percentage point] interest rate increase in September,” he said.
