May 16, 2022: On Thursday, the Hong Kong Monetary Authority (HKMA) bought HK$1.586 billion from the market to stop the local currency from breaking its peg to the U.S. dollar, the first intervention of the central bank in 18 months.

The Hong Kong dollar is pegged to a strong band of 7.75 and 7.85 versus the U.S. dollar. It was very softening as U.S. interest rates increased while a surfeit of cash in the local banking system kept Hong Kong rates.

A benchmark lending rate on one-month U.S. dollar Libor is around 0.8%, while the Hong Kong equivalent, one-month Hibor, is less than 0.2% and over its Covid-19 pandemic lows.

In the previous month, HKMA’s Chief Executive Eddie Yue said that as it intervenes and funds flow out of Hong Kong’s system, local rates should rise, which removes the incentive for market players to conduct “carry trades” and keep the Hong Kong dollar trading within its band.

“All these are normal operations following the design of the Linked Exchange Rate System,” he said.

This arrangement was made in 1983 and has survived several crises for many years, which include an attack from famed short-seller George Soros in the 1997-98 Asian financial crisis.

The HKMA last intervened in October 2020. That year it sold HK$383.5 billion worth to rein in the strengthening currency, according to HKMA data, while it last intervened at the weak end of the band in March 2019.

On Thursday, the aggregate balance, the critical gauge of cash in the banking system, will come down to HK$336.005 billion on May 13, an HKMA spokeswoman said.

It dropped to nearly HK$50 billion in 2019 after the previous series of HKMA interventions to stop the currency from weakening.

In 2020 it surged to over HK$450 billion as capital rushed into Hong Kong, drawn by bigger interest rates locally than in the U.S. and extensive initial public offerings.