What you need to know about HKMA's surprising intervention

A whopping $1.85bn was bought.

According to Bank of America Merrill Lynch, after intervening for the first time since 2009 at the strong end of the peg last Friday, HKMA intervened again earlier in the week. A combined $1.85bn was bought according to an emailed statement by HKMA.

Here's more from BofAML:

This will result in an increase in the interbank aggregate balance, which forms a part of HK’s monetary base. Further HKD inflow hinges on ADXY and equities In recent years spot HKD has had a strong correlation with ADXY and the HSI.

We expect the same pattern to continue. Hence more spot CNY strengthening and a continuation of positive sentiment towards HK/China equities is likely required to keep HKD stuck at the low end of the band at 7.7500.

With HKD having lagged other Asia FX because of the peg, and some slightly encouraging China data, we expect HKD to stay very close to the strong end of the peg which means further HKMA interventions are possible.

This should keep front-end rates low. But with 1y IRS (0.36%) already close to 4bps below 3m HIBOR fixing (0.396%) in our view this is to an extent priced in.

Back-end HK rates will likely remain more a function of corporate flows and global risk sentiment. Look for opportunities to fade depeg speculation, but not here yet.

With HKMA having repeated the peg will stay and there being no clear superior alternative to the existing peg, risk reward generally favors fading any meaningful depeg speculation. That said, at this stage it may be a bit too early to do so with USDHKD FX Forward and USDHKD FX implied vol still not yet close to previous extreme levels.