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- Since 2 May, HKMA has sold HKD129.4bn to defend USD/HKD’s 7.75 strong-side limit required by Hong Kong Linked Exchange Rate System (LERs).
- Strong HKD demand related to stock investment in HK market was the primary factor for HKD’s recent strength and it likely continues to support the currency in near term. We expect USD/HKD to be in the range of 7.75 to 7.78. With potential tailwinds like a weaker US dollar, USD/HKD could approach 7.75.
- We expect more HKMA’s interventions ahead and think the worry about LERs’ sustainability is overdone.
- The automatic interest rate adjustment mechanism implied by (LERs) would further reduce interest rates and funding costs in the economy, which is conducive for real economic activity.
An increase in aggregate balance would push HIBOR lower
