The Peg and HK Rates

[traineeinvestor]

Okay there's something here I'm not sure if I understand:

1. the HKMA has spent HK$8.5 billion supporting the peg this week:



2. this has been attributed to capital outflows due to the carry trade (borrowing at lower interest rates in HKD and invest in higher yielding USD assets):




Would I be correct in assuming that the HKMA is doing this because lower HKD interest rates are better for the HK economy (especially right now) and they can afford to do so because the size of the monetary reserves is such that the peg is not in any danger (or at least the HKMA thinks so)?

[freeier]

Simply said, in finance for a freely convertible currency, you can either fix the interest rate and let exchange rate float, or you can fix exchange rate and let interest rate float.
HK's case, due to the currency regime, chooses to set exchange rate and leave interest rate floating.

So daily the interest rate between banks are market driven.
HK government has one interest rate set that's applicable, its the Base Rate, where if a bank really have no place to borrow money, they can put up asset to borrow from HKMA at US Fed fund rate + 0.50% (IIRC, on the spread). But this rate generally do not affect money market rates in hk (more like just a cap keeping overnight rates below the Base Rate)

Over the past 2 years, demand for HKD was high (don't ask me why, but just factually). In total more than HK$ 300 or 400b were converted from USD into HKD, when USD-HKD rate was at 7.75, and that grew something called the 'Aggregate Balance' from a low double digit to more than 400b (HKMA were selling HKD to the USD holders at 7.75.)

'Aggregate Balance' is the floating liquidity in the HK banking system (I will leave out the part where HKMA sometimes uses exchange bill to suck liquidity from the aggregate balance when its really overflowing) and currently still stays at HK$ 338b minus what was used early this week (when the world screamed about HKMA intervening in the market)

During normal business, the 338b is being lent by banks to banks, to corporates, to etc.. these cause the HKD interest rate to stay low. Overnight rates this week still stay at less than 0.1%, even though US has hiked their target rate range to 0.75~1.00%.

What would cause the rates to go up --> mainly when the Aggregate balance falls to close to 0.. that signals no excess liquidity in the HKD market and banks will have to borrow/lend to each other at rate closer to USD rates. Aggregate balance can fall in two ways, 1. HKMA can suck more liquidity from the Aggregate balance by issuing more bonds, or 2. selling of HKD continues and drains the liquidity in the aggregate balance.

Bank researchers are saying rates will start to follow US rates when Aggregate balance falls till low double digit.. well, nobody knows so we can only watch and see.

[RobRoy]

freeier, do you work as a Treasury/Forward dealer or so? You explain it well!

Further reading and comments:

FAQ: https://www.hkma.gov.hk/eng/news-and...8/05/20180524/

Explaining LERS: https://www.hkma.gov.hk/media/eng/pu...b201812/fa.pdf

https://www.hkma.gov.hk/eng/key-func...the-lers-work/

[Peaky]

Would I be correct in assuming that the HKMA is doing this because lower HKD interest rates are better for the HK economy (especially right now) and they can afford to do so because the size of the monetary reserves is such that the peg is not in any danger (or at least the HKMA thinks so)?

Exactly this. In the end the peg is almost the same as a common currency in that it ties the hands of monetary policy. The HKMA aggregate balances will act as a buffer and be used to support the peg for as long as possible with HIBOR staying low. However if the Fed moves anything like as fast as the market implies, HIBOR will have to start to move by July/August at the latest. If you look at the history then 1m HIBOR vs the HKMA base rate can't really sustain with a spread over 100-150bps... the arbitrage opportunity into USD is just too great and the flows would swamp the ammunition HKMA have.

[GentleGeorge]

https://www.scmp.com/business/bankin...d-currency-peg

Wondering if another stablecoin could be about to go the way of Terra Luna USD...

Totally addicted to Bass?

[traineeinvestor]

https://www.scmp.com/business/bankin...d-currency-peg

Wondering if another stablecoin could be about to go the way of Terra Luna USD...

Totally addicted to Bass?

To put this into context, the amount spent this week is less than one fifth of one percent of HK's monetary reserves.

And that's assuming the PRC doesn't backstop the peg.

[billyb]

Sorry, stupid question, is it any selling of HKD for another currency (eg GBP) that would affect the peg (and possibly result in HKMA intervention), or is it just selling HKD for USD?

[TheBrit]

To put this into context, the amount spent this week is less than one fifth of one percent of HK's monetary reserves.

It's pretty well understood that HKMA can maintain the peg for as long as they want to. It survived plenty of turbulent times, not least the AFC And GFC unscathed.

There are a few idiots like Kyle Bass who didn't do his due diligence and has paid the price for getting into a trade he didn't understand and couldn't win.

Not surprised a few cryptoweenies are in that club of ignorance.

[Peaky]

Sorry, stupid question, is it any selling of HKD for another currency (eg GBP) that would affect the peg (and possibly result in HKMA intervention), or is it just selling HKD for USD?

Any selling... anything putting more HKD into the market needs to be offset by HKMA buying it up at the pegged rate to avoid downward pressure on the price (I.e. exchange rate).

When the HKMA life support runs low then rates will rise and keep demand where it needs to be to maintain the peg. Little danger of it actually breaking. Consequences for the economy will really depend on how much fiscal support Beijing provides, and whether they again try to backstop the HSI. Given what they're doing to Shanghai I'm not expecting any fucks to be given.

[blandy62]

they can but what if there was a coordinated attached on the HKG ? Times have change...