This week has seen Hong Kong’s first foreign exchange intervention in almost two years to curb currency strength and analysts expect more of the same in the weeks ahead.
That’s because renewed optimism towards China’s equity market and strong flows into Hong Kong’s bond and stock markets should keep upward pressure on the Hong Kong dollar, they believe.
The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, said on Wednesday it bought $2.1 billion over two days to contain gains in the local currency.
It was the first official intervention since the fourth quarter of 2012.
“We think it was the first in what will prove to be another episode of concerted defense of the peg,” said Tim Condon, head of research for Asia at ING Financial Markets.
“The intervention is noteworthy for what it says about the global investment climate. We attribute it principally to improved sentiment toward China having stoked risk appetites,” he said in a note on Friday.
The Hong Kong dollar is pegged at 7.8 to the U.S. dollar, but can trade between 7.75 and 7.85. Under the currency peg, which has been in place since 1983, the HKMA is obliged to intervene when the Hong Kong dollar hits 7.75 or 7.85 to maintain the band.