The Hong Kong Monetary Authority (HKMA) has just intervened in the currency market as the HK dollar (HKD) hit the weak side (7.85) of the trading band against US dollar (USD), the first time since 2005. The de facto central bank of the city has bought HK$816M Hong Kong dollars from the currency market. The intervention would lower the aggregate balance to HK$178.96 billion on April 16, when the withdrawn funds will be settled. Interbank liquidity would stay ample after the withdrawal. We do not think this would help much, if any, in narrowing the spread between HIBOR and LIBOR, the key reason causing capital to flow out of Hong Kong and hence weakness of HKD. As such, we do not feel surprised to see HKD to hit the weak side of the trading band again and this might lead to further HKMA intervention.

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