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Brace for more intervention on Hong Kong dollar

Brace for more intervention on Hong Kong dollar

CENTRAL: Hong Kong dollar has stabilized at the hands of foreign exchange interventions over the past few days, but more action will be necessary to reverse the weakness brought on by the stark interest-rate gap between Hong Kong and the U.S.

The U.S.-Hong Kong dollar exchange rate USDHKD, +0.0076%  has been sitting at an all-time high of 7.85, which is the wide end of the permitted trading range of the pegged pair that starts at 7.75.The weakness in the Hong Kong dollar has been largely attributable to a widening in the Libor-Hibor spread,” said Kotecha, referring to the difference between the London Interbank Offered Rate and the Hong Kong Interbank Offered Rate.Making matters worse, liquidity in Hong Kong is rampant thanks to capital inflows from mainland China into Hong Kong dollar-denominated assets, even as those recently slowed due to Chinese capital controls. All this liquidity means downward pressure on Hibor and upward pressure on Libor in part thanks to the Federal Reserve raising rates and unwinding its balance sheet. Given that, the spread between the two doesn’t have much reason to tighten any time soon.