HONG KONG, April 4 (Reuters) - Hong Kong's de-facto central bank bought HK$7.104 billion ($905 million) worth of U.S. dollars during New York's Monday trading hours to stop the local currency weakening beyond its target range.
The Hong Kong dollar is pegged within a band of 7.75 to 7.85 versus the U.S. dollar. It touched 7.85 on Monday.
The aggregate balance - the main gauge of cash in Hong Kong's banking system - will fall to HK$69.915 billion on April 6, an HKMA spokesperson said on Tuesday morning.
The Hong Kong Monetary Authority (HKMA) has bought the equivalent of $34.2 billion since 2022 in 44 rounds of interventions since the U.S. Federal Reserve began hiking interest rates last March.
The Hong Kong banking system remains flush with cash due to a lack of popular initial public offerings (IPOs), which used to lock up large amount of subscription money from retail investors and squeeze short-term interbank borrowing costs, analysts said.
Combined with weak loan demand, banks' appetite for funding remains low. Hong Kong interbank rates therefore continue to hover at a discount compared to U.S. interbank rates despite the multiple rounds of HKMA's interventions squeezing the banking system's cash balances, said Ken Cheung, chief Asian FX strategist at Mizhuho Bank.
"Before the U.S. Federal Reserve pauses its current interest rate cycle I'd expect the Hong Kong dollar to remain volatile, and hover in the weaker-half of a trading band at 7.8 to 7.85," said Cheung.
One-month Hibor was at 3.09530% on Monday, down from the peak of 5.08208% in December. That represents a discount of about 176 basis points (bps) below equivalent tenor U.S. Libor, down from the 247 bps seen in mid-February which was widest discount in more than 15 years.
Under Hong Kong's Linked Exchange Rate System, the HKMA is committed to intervene to maintain the peg whenever the Hong Kong dollar weakens or strengthens to either end of the trading band.
"We expect Hong Kong dollar rates to bottom out on thinner aggregate balance following the HKMA's interventions and upcoming IPOs," latter this year, said Mizuho's Cheung.
($1 = 7.8478 Hong Kong dollars) (Reporting by Donny Kwok and Georgina Lee; Editing by Christopher Cushing and Tom Hogue)
