Having blown through almost US$7 billion in the last few days to rescue the Hong Kong Dollar from breaking the weaker-end of its peg-band, the HKD is jumping (most in 3 months) following comments that HKMA doesn't see "large-scale shorting" but more arbitrage activities.
In a press briefing, Hong Kong Monetary Authority Deputy Chief Executive Howard Lee said FX transactions are in line with expectations and sees no unusual HKD shorting activity. As Bloomberg notes, Lee said:
A lot of outflows are arbitrage activities, but probably of asset transfers.
HKD purchases operation is smooth and sound.
HKMA will carefully handle if unusual activity is seen.
HKD interbank rates are slowly increasing and HKMA expects this to continue.
Market confidence is strong on linked exchange system and the HKMA.
Exchange fund bills will be available for bank funding when needed.
And the local currency jumped most since Jan 17th...
As a reminder, Lee is the same gentlemen that warned Hong Kong citizens to "stay calm" as ATMs ran dry and the currency devalued.
While this 0.07% spike is cause for some celebration at the HKMA, we note that - just as we have seen in the last few days - the strength is being sold into already...
As while the LIBOR-HIBOR arb has improved (with cost of funds surging in Hong Kong), the spread of over 100bps remains a considerable draw for carry-traders...
As a reminder, this story is not over yet, as this is an arbitrage, where traders take advantage of differences in prices, selling a low-yielding product (the Hong Kong dollar) to buy a high-yielding product (the US dollar). In this case, the price difference is between the local borrowing cost known as the Hong Kong interbank offered rate (Hibor) and the US borrowing cost known as the Libor.
Simply put, traders are borrowing against the low Hibor, selling the Hong Kong dollar to buy the US currency for investments in high-yielding US assets. The difference between the two is widest since 2008.
As more traders pile on to the carry, more pressure is placed on the Hong Kong dollar, causing it to weaken further against the US currency... and The Fed's plan to hike rates (as many as four times - which just hit a cycle high) will do nothing to help ease the situation - meaning any dollars sold in defense of the weaker HKD will be battling global carry trade flows driven by The Fed's tightening.