Hong Kong Monetary Authority (HKMA) intervened three times on yesterday afternoon to stem a strong Hong Kong dollar. A total of HK$5.813 billion had been injected to the banking system.

Hong Kong dollar was trading around the top of its trading band, which triggered the city's central bank to inject liquidity to keep the currency within its pegged limit. HKMA added HK$2.325 billion into the banking system but was unable to curb the strong currency. And further injections worth HK$775 million and HK$2.713 billion were made to the market within an hour.

The aggregate balance, which is the sum of balances on clearing accounts maintained by banks with the HKMA, was projected to increase to HK$48.82 billion tomorrow when the latest transactions are settled.

Hong Kong dollar is pegged at 7.8 to the US dollar, but it can trade between 7.75 and 7.85. The currency hit its upper limit at 7.75 repeatedly yesterday.

Alan Luk, Hang Seng Bank's head of investment advisory, said there was huge demand from regional funds for Hong Kong dollar that propped the currency.

"Funds see Hong Kong dollar as a shelter amid the volatile global markets," Luk said, noting that the banking system in Hong Kong is relatively transparent and robust. In particular, the HKMA provides 100 percent guarantee to deposits.

Investors intended to buy Hong Kong dollar after selling their high-yield currencies and high risk investments, he added.

"Hong Kong dollar will remain strong until the global market turmoil calms down," he said.

Spot Hong Kong dollar was quoted at 7.7502 to a dollar and it was quite close to its upper band despite the central bank's repeated intervention.

Some dealers said strong demand for Hong Kong dollar was due to investors unwinding carry trade position amid a narrow differential between Hong Kong and US interbank rates in the past few days.

However, Luk believes that the amount of Hong Kong dollars involved in carry trade should not be substantial.

The money market rates lowered after the liquidity injections by the HKMA. The three-month Hong Kong Interbank offered rate (Hibor) was quoted at 2.05 percent in the late afternoon, its lowest level since June 10. And the one-month Hibor was quoted at around 1 percent.

The softened interbank rates would add pressure on local banks to cut their prime lending rates again.

Luk expects banks to consider another rate cut cautiously. "Interbank rates trend is not the only consideration."

(HK Edition 11/12/2008 page2)