HKMA Buys $1.6 Billion in Currency Defense on Merger Demand

Hong Kong’s de facto central bank bought $1.63 billion this week to maintain the city’s 31-year-old currency peg to the greenback as merger activity boosted demand for the local dollar.

The Hong Kong Monetary Authority made purchases on July 1 for the first time since December 2012 and said demand for the local currency “increased lately,” partly driven by “commercial activities, including merger and acquisition activities and dividend distribution.” The authority, known as the HKMA, said today it has no further comments to add to last week’s statement.

Hong Kong linked its currency to the U.S. dollar in 1983 when negotiations between China and the U.K. over the city’s return to Chinese rule spurred capital outflows. It was kept at HK$7.8 per dollar until 2005, when policy makers committed to limiting the currency’s decline to HK$7.85 and capping gains at HK$7.75. The Hong Kong dollar traded at the strong end of its trading range as of 5:54 p.m. local time.

“The Hong Kong dollar has been strong for a technical reason due to the M&A activities,” said Ho Man Chun, a strategist at Bank of Communications Co.’s Hong Kong branch. “We aren’t seeing strong inflows into the city’s markets, nor any tightness in terms of liquidity in the banking system.”

’Most Suitable’

The Hong Kong dollar’s overnight interbank rate was at 0.07143 percent today, down from 0.19857 percent on June 30, according to fixings provided by the Hong Kong Association of Banks. The rate for 12 months was 0.855 percent, little changed from 0.865 percent at the end of last month.

The Hong Kong government’s commitment to maintaining the peg “is clear and unwavering,” HKMA chief Norman Chan wrote in an article published on the authority’s website on July 7. “Despite its imperfections, the linked exchange-rate system is still the most suitable regime for Hong Kong after thorough consideration of all the related factors.”

The city’s dollar peg doesn’t necessarily need to be changed, Hong Kong Economic Times reported today, citing an interview with former HKMA chief Joseph Yam. Every monetary system needs to be reviewed from time to time, Yam said.

Estimates Raised

Overseas-Chinese Banking Corp. will forge ahead with its $5 billion bid for Hong Kong’s Wing Hang Bank Ltd., the Singapore lender’s chief executive officer Samuel Tsien said in an interview yesterday.

Hong Kong-listed Citic Pacific Ltd. said on June 17 that it would offer an additional $690 million of stock to 10 investors including Tencent Holdings Ltd., after selling $5.1 billion of shares in May. Citic Pacific is raising funds through share sales in order to buy $36 billion of assets from its state-owned Chinese parent.

Standard Chartered Plc raised its end-2014 estimate for the Hong Kong dollar to HK$7.75 against the greenback, from an initial HK$7.77, based on capital inflows, corporate repatriation before the tax season and interest-rate differentials, Hong Kong-based analysts including Eddie Cheung wrote in a note today. A weak greenback has also played a role in higher demand for the Hong Kong’s currency, Cheung said.

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