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Investing.com -- The Hong Kong dollar approached the weak end of its trading band against the U.S. dollar, nearing the 7.85 level that would trigger intervention by the Hong Kong Monetary Authority (HKMA). The currency’s movement follows a May liquidity injection that drove one-day Hong Kong dollar funding costs close to zero, creating a significant rate differential that prompted strong buying pressure on USD/HKD.
When the exchange rate reaches 7.85, the HKMA would be required to sell U.S. dollars and reduce Hong Kong dollar liquidity under its currency board system. This intervention would push Hong Kong dollar funding costs higher and reduce demand for buying USD/HKD until the currency pair finds a new equilibrium level.
Citi analysts estimate that about HKD 70-100 billion in liquidity will be drained if the HKMA intervenes. This reduction would still leave some of the liquidity injected in May in the banking system.
Hong Kong dollar short-term funding costs may stabilize at 2-3% following the intervention, according to Citi. This would represent a significant increase from the current sub-1% levels but would remain below the 3.5% level observed before the May liquidity injection.
The USD/HKD exchange rate may eventually stabilize around the 7.82-7.83 level after the HKMA’s intervention takes effect, Citi analysts predict. This would represent a modest strengthening of the Hong Kong dollar from the current levels near the weak end of its trading band.
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