Annex A
EXCHANGE FUND ADVISORY COMMITTEE
Currency Board Sub-Committee
Report on Currency Board Operations
(20 September 2008 – 20 November 2008)
The Hong Kong dollar exchange rate strengthened to the
strong-side Convertibility Undertaking of 7.75 during the
review period due to unwinding of long US dollar-short
Hong Kong dollar carry trades and possible repatriation of
funds by domestic corporations. Local interbank interest
rates rose markedly after the global financial crisis deepened
in mid-September. To ease money market stress, the HKMA
conducted foreign exchange operations to inject liquidity
into the banking system; announced five temporary measures
to provide liquidity assistance to banks; amended the
formula for the calculation of the Base Rate, effectively
lowering borrowing cost at the Discount Window; and
increased the supply of Exchange Fund paper. The Financial
Secretary announced two pre-emptive measures including a
temporary 100% deposit guarantee and a contingent capital
facility to bolster public confidence in the banking system.
As a result, local interbank interest rates eased. The
Aggregate Balance expanded during the period as a result of
both the operation of the HKMA within the Convertibility
Zone and the trigger of strong-side Convertibility
Undertaking. These operations were in line with Currency
Board principles, with changes in the Monetary Base fully
matched by changes in foreign reserves.
-2Hong Kong dollar exchange rate
Chart 1
Hong Kong dollar exchange rate
(closing rate)
HK$/US$
7.89
1. The Hong Kong dollar
exchange
rate
strengthened
towards
the
strong-side
Convertibility Undertaking (CU)
in September and October, and
stayed close to 7.75 afterwards,
with the strong-side CU being
triggered 26 times between 31
October and 20 November (Chart 1).
The strengthening reflected the
unwinding of carry trades and
possible repatriation of funds by
domestic corporations. Meanwhile,
the effective exchange rate index of
the Hong Kong dollar rose
markedly from 87.7 to 90.9, as the
US dollar appreciated against other
major currencies except for the
Japanese yen (Chart 2).
7.89
Weak-side Convertibility Undertaking
7.87
7.87
7.85
7.85
7.83
7.83
7.81
7.81
7.79
7.79
7.77
7.77
7.75
7.75
7.73
7.71
06/08
7.73
Strong-side Convertibility Undertaking
7.71
20/08
Jan 2000=100
102
03/09
17/09
01/10
15/10
29/10
12/11
Chart 2
Effective Exchange Rate Index
102
100
98
100
98
96
94
96
94
92
90
92
90
88
86
88
86
84
82
Jan 05
84
82
Jul 05
Jan 06
Jul 06
Jan 07
Jul 07
Jan 08
Jul 08
Interest rates
2.
Following the failure of the
US investment bank Lehman
Brothers, global money market
conditions considerably tightened.
Reflecting heightened perception
of counterparty credit risk and
stockpiling
of
liquidity
for
contingency,
local
term
interbank
interest
rates
increased sharply between midSeptember and mid-October
(Chart 3). The one-month, three-
Chart 3
HIBORs
% p.a.
6.0
1-month
6.0
3-month
12-month
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
06/08
0.0
20/08
03/09
17/09
01/10
15/10
29/10
12/11
-3month and the 12-month HIBORs
surged to 5.0%, 4.6% and 4.0%
respectively on 9 October, in part
following the rise in USD interest
rates.
In view of the sharp
increases in HIBORs and the
potential fragility of banking
confidence caused by a smallscale retail-deposit run on a local
bank on 24 September, the HKMA
operated within the Convertibility
Zone on 18 and 25 September to
inject liquidity into the banking
system. As a result, the overnight
and
one-month
HIBORs
temporarily eased. On 2 October,
the HKMA implemented five
temporary measures to provide
term liquidity to licensed banks
upon request, against a range of
collateral of acceptable quality.
On 8 October, the HKMA revised
the formula for calculation of the
Base Rate effectively lowering
borrowing cost at the Discount
Window. The Financial Secretary
introduced two new precautionary
measures including a temporary,
100% deposit guarantee and a
contingent capital facility to
bolster public confidence in the
banking system. Term HIBORs
generally eased following these
measures and also the declines in
LIBORs after the global efforts to
ease market stresses. Renewed
tightness in the interbank market
emerged in late October on
concerns about pressures on
-4certain emerging markets.
In
response, the HKMA carried out
three more within-zone foreign
exchange operations, one on 23
October and two on 27 October, to
inject liquidity in the banking
system. Later on, the strong-side
Convertibility Undertaking was
repeatedly triggered in late
October-mid November, further
expanding liquidity in the banking
system. As a result, interbank
interest rates moderated further in
late October and early November.
The one-month, three-month and
12-month HIBORs closed at 1.1%,
2.1% and 2.5% respectively on 20
November.
3.
Interest rate volatility,
measured
by
the
standard
deviation of daily changes in onemonth HIBOR, rose markedly in
September but edged down in
October and November as money
markets
showed
signs
of
stabilisation.
The standard
deviation as a ratio of the average
level of one-month HIBOR also
showed
the
same
pattern
1
(Chart 4).
1
Chart 4
Interest rate volatility
0.5
0.5
Standard deviation of daily
changes in 1-month HIBOR
0.4
0.4
Standard deviation of daily
changes in 1-month HIBOR
relative to its monthly average
0.3
0.2
0.3
0.2
0.1
0.0
Jan 05
0.1
0.0
Jul 05
Jan 06
Jul 06
Jan 07
Jul 07
Jan 08
Jul 08
The ratio of the standard deviation of daily changes in the one-month HIBOR to its monthly average
measures the extent of interest rate fluctuations relative to the average level of interest rates.
-54.
As interest rate volatility
increased, the spreads of Hong
Kong dollar interest rates
against
their
US
dollar
counterparts fluctuated sharply,
with interest rate discounts
occasionally
turning
into
premia in the early part of the
reporting period (Chart 5).
5.
The Hong Kong dollar
three-month
and
12-month
forward discounts generally
narrowed in the early part of
the review period, partly due to
some narrowing of interest rate
spreads amid heightened credit
and liquidity concern in the
interbank market. As interest rate
spreads narrowed again towards
the end of October on concerns
about
pressures
on
certain
emerging markets, the forward
points turned from discounts to
premia in late October. The
three-month
and
12-month
forward points closed at -42 pips
and -85 pips respectively on 20
November (Chart 6).
Chart 5
Hong Kong dollar - US dollar
interest rate spreads
% p.a.
2.0
1-month
3-month
2.0
12-month
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
-2.0
-3.0
-3.0
-4.0
06/08
pips
600
-4.0
20/08
03/09
17/09
01/10
15/10
29/10
Chart 6
Hong Kong dollar forward points
400
600
400
12-month
200
0
12/11
200
0
3-month
-200
-200
-400
-400
-600
06/08
-600
20/08
03/09
17/09
01/10
15/10
29/10
12/11
-66.
Yields of Exchange Fund
paper declined across-the-board
during
the
review
period
(Chart 7). In particular, increased
demand for Exchange Fund paper
by banks for liquidity management
purposes drove the implied yields
of short-dated Exchange Fund
paper to very low levels or below
zero in late September and the
first half of October. To meet the
higher demand for such paper, the
HKMA announced on 20 October
the issuance of HK$4 billion of
additional three-month Exchange
Fund Bills in the tenders on 28
October and 4 November. On that
announcement date, the HKMA
operated within the Convertibility
Zone by purchasing US dollars
against Hong Kong dollars, so that
the initial HK$4 billion increase in
the Aggregate
Balance was
subsequently offset in two steps
by completing the allotments of
the additional Exchange Fund
Bills. On the other hand, the tenyear and 15-year negative yield
spreads of Exchange Fund paper
over US Treasuries widened
notably during the review period,
partly because a flight to safety
pushed the yields of long-term
Exchange Fund Notes down
(Table 1).
% p.a.
8
Chart 7
Exchange Fund paper yield curves
7
7
end-Jun 97
6
6
5
5
4
4
19 Sep 08
3
3
2
2
20 Nov 08
1
0
8
1
0
1W 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 15Y
Table 1
Yield spreads of Exchange Fund paper over
US Treasuries (basis points)
27 Jun 97
19 Sep 08 20 Nov 08
3-month
1-year
3-year
5-year
10-year
15-year
56
21
3
27
54
-
88
-23
-12
-36
-95
-146
0
-51
-30
-58
-181
-246
-77.
The HKMA Base Rate
was adjusted downward from
3.5% to 2.0% on 9 October
following the revision of the Base
Rate formula and a 50-basis-point
cut in the US Federal Funds
Target Rate (FFTR) on 8 October
(US time) (Chart 8). The formula
for determination of the Base Rate
is changed by reducing the spread
of 150 basis points above the
prevailing FFTR to 50 basis points
and by removing the other leg
relating to the moving averages of
the relevant interest rates. The
change will be in place until the
end of March 2009, before which
a review will be made to
determine an appropriate formula.
On 29 October, the Base Rate
was reduced further to 1.5%.
8.
The average one-month
time deposit rate offered by
major authorized institutions
increased in the latter part of
September and early October,
as some banks tried to secure
more stable and longer term
funding in view of the dislocation
in the interbank market.
The
average time deposit rate
declined afterwards alongside
moderation in term HIBORs.
Overall, the average time deposit
rate decreased from 0.49% to
Chart 8
Base Rate and overnight HIBOR
% p.a.
6
6
Closing O/N HIBOR
5
4
Simple average of 5-day moving averages of O/N & 1M HIBORs
4
Federal funds target rate (FFTR) + 150bps
3
New Base Rate
(FFTR+50bps)
2
1
3
2
1
0
06/08
5
0
20/08
03/09
17/09
01/10
15/10
29/10
12/11
-82
0.08% during the review period.
Between 8 and 10 November,
major retail banks reduced their
BLRs by 25 basis points while
DBS Bank maintained its BLR at
5.5%.
This resulted in three
BLRs of 5.00%, 5.25% and 5.50%
for a few days. On 14 November,
DBS Bank cut its BLR by 25
basis points to 5.25%. After that,
there were two Best Lending
Rates of 5.00% and 5.25%
through the end of the reporting
period. Having declined for 12
consecutive months, the effective
deposit rate increased slightly to
0.35% in September from 0.34%
in July and 0.33% in August
(Chart 9). 3 The composite interest
rate, which reflects the average
cost of funds of banks, increased
further to 1.28% at the end of
October, compared with 1.18% at the
end of September.4
2
3
4
% p.a.
2.8
Chart 9
Effective Hong Kong dollar deposit rate
2.8
2.4
2.4
2.0
2.0
1.6
1.6
1.2
1.2
0.8
0.8
0.4
0.4
0.0
Jan 05
0.0
Jul 05
Jan 06
Jul 06
Jan 07
Jul 07
Jan 08
Jul 08
The figures refer to the average of interest rates offered by major authorized institutions for one-month
time deposits of less than HK$100,000.
This is the average of the interest rates on demand, savings and time deposits. As the banking statistics
classify deposits by remaining maturities, we have made certain assumptions regarding the maturity
distribution in computing the effective deposit rate.
This is a weighted average interest rate of all Hong Kong dollar interest bearing liabilities, which
include deposits from customers, amounts due to banks, negotiable certificates of deposit and other debt
instruments, and Hong Kong dollar non-interest bearing demand deposits on the books of banks. Data
from retail banks, which account for about 90% of the total customers’ deposits in the banking sector,
are used in the calculation.
-9-
Monetary Base
9.
The Monetary Base, which
consists
of
Certificates
of
Indebtedness (CIs), governmentissued currency notes and coins in
circulation, the Aggregate Balance
and Exchange Fund Bills and
Notes,
increased
from
HK$328.79 billion to HK$385.44
billion during the reporting period
(Table 2), mainly reflecting an
increase in the Aggregate Balance.
Movements in the individual
components are discussed below.
Table 2
Monetary Base
(HK$bn)
22 Sep 08
20 Nov 08
CIs
Government-issued
Currency Notes and
Coins in Circulation
Aggregate Balance
Outstanding EFBNs
166.49
8.21
168.99
8.23
6.40
147.70
53.08
155.15
Monetary Base
328.79
385.44
Certificates of Indebtedness
10. During the reporting period,
the three note-issuing banks
submitted a total of US$321
million to the HKMA in exchange
for HK$2.5 billion worth of CIs.
The outstanding CIs surged to
around HK$180 billion at the
end of September partly due to
the effects of month end and a
long holiday for mainland visitors,
and partly due to a small-scale
retail-deposit run on a local bank,
but gradually declined to
HK$168.99 billion at the end of
the review period (Chart 10).
Chart 10
Certificates of Indebtedness
HK$ bn
185
185
180
180
175
175
170
170
165
165
160
06/08
160
20/08
03/09
17/09
01/10
15/10
29/10
12/11
- 10 Government-issued
currency
notes and coins in circulation
HK$ bn
10
11. The
amount
of
government-issued
currency
notes and coins in circulation
edged up from HK$8.21 billion
to HK$8.23 billion during the
review period (Chart 11).
Aggregate Balance
12. The Aggregate Balance
surged from HK$6.4 billion to
HK$53.08 billion during the
reporting period (Chart 12).
The marked increase reflected the
liquidity injections into the
banking sector by the HKMA in
late September and late October,
and the repeated triggerings of the
strong-side
Convertibility
Undertaking between 31 October
and 20 November (Table 3).
These
foreign
exchange
operations are consistent with
Currency Board principles, as the
increases in the Monetary Base
were matched by equivalent
increases in US dollar reserves.
The
Aggregate
Balance
is
projected to rise to HK$84.272
billion on 24 November.
Chart 11
Government-issued currency notes
and coins in circulation
10
9
9
8
8
7
7
6
06/08
6
20/08
03/09
17/09
01/10
15/10
29/10
12/11
Chart 12
Aggregate Balance
HK$ bn
60
(before Discount Window activities)
60
including EFBN interest payments
50
50
excluding EFBN interest payments
40
40
30
30
20
20
10
10
0
06/08
0
20/08
03/09
17/09
01/10
15/10
29/10
12/11
Table 3
HKMA HK$/US$ FX Transactions
(20 Sep 08 – 20 Nov 08)
Trade Date
Net HK$ purchase (+)
(HK$mn)
25 Sep
-3,883.00
20 Oct
-3,995.89
23 Oct
-3,876.85
27 Oct
-15,506.50
31 Oct
3 Nov
4 Nov
5 Nov
7 Nov
10 Nov
-2,813.25
-852.50
-813.75
-3,875.00
-3,255.00
-1,937.50
11 Nov
14 Nov
18 Nov
19 Nov
20 Nov
-5,812.50
-3,100.00
-1,162.50
-12,942.50
-18,212.50*
Total
-82,039.24
* Figure will be shown in the Aggregate Balance
on 24 November.
- 11 Outstanding Exchange Fund Bills
and Notes
13. The market value of
outstanding Exchange Fund Bills
and
Notes
increased
from
HK$147.70 billion to HK$155.15
billion during the review period,
partly reflecting the additional
supply of Exchange Fund Bills in
late October and early November.
Holdings of Exchange Fund
paper by the banking sector
(before
Discount
Window
activities) also expanded from
HK$95.63 billion (64.7% of total)
to HK$103.92 billion (67.0% of
total) (Chart 13).
14.
During the reporting period,
HK$279.37 million of interest
payments on Exchange Fund
paper were made. Taking into
account interest payments brought
forward from the last reporting
period, an additional HK$359.81
million (in market value) of
Exchange Fund paper was
issued to absorb these interest
payments. The Exchange Fund
papers issued were well received
by the market (Table 4).
Chart 13
Exchange Fund paper held
by licensed banks
HK$ bn
106
106
104
104
102
102
100
100
98
98
96
96
94
06/08
94
20/08
03/09
17/09
01/10
15/10
29/10
12/11
Table 4
Issuance of Exchange Fund Bills and Notes
(20 Sep 08 –20 Nov 08)
1-month EFB
3-month EFB
6-month EFB
12-month EFB
2-year EFN
3-year EFN
5-year EFN
No. of
issues
launched
1
9
5
2
1
1
1
Oversubscription ratio
2.0
1.09-7.61
2.00-5.88
2.06-6.92
3.00
2.37
2.10
% p.a.
HK$
bn
5
1.0
Chart
Chart8 14
Base
Rate
and
overnight
HIBOR
Discount Window
borrowing
federal funds target rate + 150bps
4
0.8
3
0.6
2
0.4
1
0.2
5
4
3
Closing O/N HIBOR
Simple average of 5-day moving averages of O/N & 1M HIBORs
2
1.0
0.8
0.6
- 12 -
0.4
Discount Window activities
1
0
0.0
04/04 11/04 18/04 25/04 02/05 09/05 16/05 23/05 30/05
05/03 12/03 19/03 26/03 02/04 09/04 16/04 23/04 30/04
0.2
0
0.0
15. Discount Window activities
increased in mid-October. During
the review period, 11 banks
borrowed a total of HK$5.61
billion from the Discount
Window,
compared
with
HK$2.69 billion in the preceding
period (Chart 14 and Table 5).
All borrowings used Exchange
Fund paper as collateral.
Chart 14
Discount Window borrowing
HK$ bn
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
06/08
0.0
20/08
Hong Kong Monetary Authority
8 January 2009
03/09
17/09
01/10
15/10
29/10
12/11
Table 5
Frequency of individual bank’s
access to the Discount Window
(20 Sep 08 –20 Nov 08)
Frequency of using
No. of banks
Discount Window
Backing Portfolio
16.
Backing assets increased
during the reporting period,
mainly reflecting the rise in the
Monetary Base. As the Backing
assets rose proportionally less
than the Monetary Base, the
Backing Ratio decreased from
111.88% on 21 September to
109.96% on 20 November
(Chart 15).
Under the Linked
Exchange Rate system, while
specific Exchange Fund assets
have been designated for the
Backing Portfolio, all Exchange
Fund assets are available to
support the Hong Kong dollar
exchange rate.
3.0
1
3
Total
%
114
9
2
11
Chart 15
Daily movement of the Backing Ratio
114
Upper Trigger Level
112
112
110
110
108
108
106
104
Jan 05
106
Lower Trigger Level
104
Jul 05
Jan 06
Jul 06
Jan 07
Jul 07
Jan 08
Jul 08