Hong Kong Spends $1.2 Billion Defending Currency Overnight

© Reuters. Hong Kong Spends $1.2 Billion Defending Currency Overnight

(Bloomberg) — Hong Kong intervened to defend its currency peg for a second day after the city’s dollar fell to the weak end of its trading band.

The Hong Kong Monetary Authority bought HK$9.5 billion ($1.2 billion) of local dollars overnight, the third-biggest intervention since the defense began last month. The HKMA mopped up HK$1.57 billion on Wednesday. Lower rates than the U.S. have made the Hong Kong dollar an attractive target for shorting.

The de-facto central has now spent $7.95 billion protecting its currency system, which has the effect of tightening liquidity in a city that’s grown fat on ultra-low borrowing costs. The city, which imports U.S. monetary policy, is facing the prospect of significantly higher rates for the first time since the financial crisis.

The three-month borrowing rate is 1.75 percent, near the highest since December 2008, and up from 0.8 percent a year earlier. The Hong Kong dollar was little changed at HK$7.8496 per greenback as of 11:40 a.m. local time.

While rising short-term funding costs have prompted banks to offer deposit rates of as much as 3 percent, there’s been little impact so far on the city’s housing market as lenders hold off raising the prime rate — which caps mortgages. Sun Hung Kai Properties Ltd. spent a record $3.2 billion buying a land plot at the city’s old airport site this week, signaling confidence demand will hold up in what’s already the world’s least affordable real estate market.

Still, with the U.S. expected to continue hiking interest rates, pressure on the Hong Kong dollar to weaken past its trading band will continue, prompting more intervention, and thereby draining liquidity further.

(Updates to add borrowing costs in fourth paragraph.)

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