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EXCHANGE FUND ADVISORY COMMITTEE
CURRENCY BOARD SUB-COMMITTEE
Report on Currency Board Operations
(19 April 2006 – 29 May 2006)
The Hong Kong dollar exchange rate weakened slightly on
the back of interest rate arbitrage activities during the
reporting period. Interbank interest rates eased slightly and
their negative spreads against US dollar rates widened . The
Monetary Base fell from HK$287.12 billion to HK$286.93
billion, largely due to a decrease in Certificates of
Indebtedness.
In accordance with Currency Board
principles, changes in the Monetary Base were fully
matched by corresponding changes in foreign reserves .
Hong Kong dollar exchange rate
1.
The Hong Kong dollar
exchange rate strengthened in the
early part of the reporting period,
reaching 7.7514 on 8 May, 14
pips above the strong-side
Convertibility Undertaking (Chart
1).
The strength was due to
continued weakness in US dollar
and increased demand for Hong
Kong dollars associated with
equity IPOs. The Hong Kong
dollar
weakened
for
the
remainder of the reporting period,
attributable to interest rate
arbitrage activities (in which
banks borrowed Hong Kong
dollars and converted them into
Chart 1
Hong Kong dollar exchange rate
(closing rate)
HK$/US$
7.89
Weak-side Convertibility Undertaking
7.87
7.85
7.83
7.81
7.79
7.77
7.75
7.73
Strong-side Convertibility Undertaking
7.71
30/03 06/04 13/04 20/04 27/04 04/05 11/05 18/05 25/05
7.89
7.87
7.85
7.83
7.81
7.79
7.77
7.75
7.73
7.71
-2US dollars to take advantage of
negative interest rate differentials)
as well as corrections in the local
equity market.
Overall, the
Hong Kong dollar exchange
rate weakened slightly to close
at 7.7565 at the end of the
reporting period. Meanwhile, the
effective exchange rate of the
Hong Kong dollar eased further,
reflecting weakness in the US
dollar (Chart 2).
Jan 2000=100
107
Chart 2
Effective Exchange Rate Index
107
105
105
103
103
101
101
99
99
97
97
95
95
93
Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06
93
Interest rates
2.
Short-term Hong Kong
dollar interbank interest rates
dropped moderately during the
reporting period.
Specifically,
the one-month and three-month
HIBORs dropped by three basis
points and six basis points to
close at 4.42% and 4.56%
respectively. Meanwhile, the 12month HIBOR rose by 10 basis
points to close at 4.80% (Chart 3).
3.
Interest rate volatility,
measured
by
the
standard
deviation of daily changes in onemonth HIBOR, rose in May. The
standard deviation as a ratio of
the average level of one-month
HIBOR also increased slightly
(Chart 4). 1
1
Chart 3
% p.a.
HIBORs
6.4
5.6
4.8
4.0
3.2
2.4
1-month
3-month
12-month
1.6
0.8
0.0
-0.8
30/03 06/04 13/04 20/04 27/04 04/05 11/05 18/05 25/05
Chart 4
Interest rate volatility
1.4
1.2
1.0
0.8
0.6
6.4
5.6
4.8
4.0
3.2
2.4
1.6
0.8
0.0
-0.8
1.4
Standard deviation of daily
changes in 1-month HIBOR
1.2
Standard deviation of daily
changes in 1-month HIBOR
relative to its monthly average
0.8
1.0
0.6
0.4
0.4
0.2
0.2
0.0
Jan 03
0.0
Jul 03
Jan 04
Jul 04
Jan 05
Jul 05
The ratio of the standard deviation of daily changes in the 1-month HIBOR to its monthly average
measures the extent of interest rate fluctuations relative to the average level of interest rates.
Jan 06
-34.
Negative spreads of Hong
Kong dollar interest rates over
the US dollar counterparts
widened slightly during the
reporting period. The one-month
and three-month spreads rose by
15 basis points and 19 basis
points to –65 basis points and –66
basis points respectively.
The
12-month spread widened by one
basis point to close at –60 basis
points (Chart 5).
5.
In line with the movements
in interest rate spreads, the Hong
Kong dollar 12-month forward
discount increased by eight pips
to close at 443 pips, while the
three-month forward discount
widened by 43 pips to close at
128 pips (Chart 6).
6.
The
yield
curve
of
Exchange
Fund
paper
steepened during the period
(Chart 7).
The negative yield
spreads against US Treasuries
narrowed in the long-end. The
three-month spread increased to 109 basis points, while the 5-year
and 10-year spreads fell to -37
basis points and -22 basis points
respectively at the end of the
period (Table 1).
Chart 5
Hong Kong dollar - US dollar
interest rate spreads
% p.a.
0.9
0.6
1-month
3-month
0.9
0.6
12-month
0.3
0.3
0.0
0.0
-0.3
-0.3
-0.6
-0.6
-0.9
-0.9
-1.2
30/03
pips
200
-1.2
06/04
13/04
20/04
27/04
04/05
11/05
18/05
25/05
Chart 6
Hong Kong dollar forward points
200
0
0
3-month
-200
-200
12-month
-400
-400
-600
30/03 06/04 13/04 20/04 27/04 04/05 11/05 18/05 25/05
-600
Chart 7
% p.a.
Exchange Fund paper yield curves
9
8
end-Jun 97
7
6
29 May 06
5
4
3
18 Apr 06
2
1
0
-1
1W 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y
9
8
7
6
5
4
3
2
1
0
-1
10Y
Table 1
Yield spreads of Exchange Fund paper over
US Treasuries (basis points)
27 Jun 97 18 Apr 06 29 May 06
3-month
1-year
3-year
5-year
10-year
56
21
3
27
54
-97
-82
-47
-38
-34
-109
-79
-56
-37
-22
-4-
7.
Following a hike of 25
basis points in the US federal
funds target rate, the HKMA
Base Rate was adjusted upward
by 25 basis points to 6.50% on
11 May 2006 according to the
established formula (Chart 8).
However, banks kept their Best
Lending Rates unchanged.
8.
The average one-month
time deposit rate offered by
major authorized institutions
rose from 2.776% to 2.781%
during the period. 2 Meanwhile,
the
effective
deposit
rate
increased from 2.32% to 2.44% in
April (Chart 9). 3 The composite
interest rate, which reflects the
average cost of funds of banks,
rose from 3.00% at the end of
March 2006 to 3.10% at the end
of April 2006. 4
% p.a.
8
7
Chart 8
Base Rate and overnight HIBOR
federal funds target rate + 150bps
8
7
6
6
5
5
4
4
3
Closing O/N HIBOR
2
1
2
Simple average of 5-day moving
averages of O/N & 1M HIBORs
0
30/03 06/04 13/04 20/04 27/04 04/05 11/05 18/05 25/05
% p.a.
2.8
3
Chart 9
Effective Hong Kong dollar deposit rate
1
0
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 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06
0.0
2
The figures refer to the average of interest rates offered by the major authorized institutions for onemonth time deposits of less than HK$100,000.
3
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.
4
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.
-5Monetary 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, fell from HK$287.12
billion to HK$286.93 billion
during the reporting period
(Table 2).
Movements in the
individual
components
are
discussed below.
Table 2
Monetary Base
(HK$ bn)
19 Apr 06
29 May 06
CIs
Government-issued
Currency Notes and
Coins in Circulation
Aggregate Balance
Outstanding EFBNs
151.16
7.13
150.58
7.07
1.25
127.60
1.35
127.93
Monetary Base
287.12
286.93
Certificates of Indebtedness
10. During the reporting period,
the three note-issuing banks
redeemed from the HKMA a total
of HK$0.58 billion of CIs in
exchange for US$0.07 billion.
As a result, the outstanding
amount of CIs declined from
HK$151.16 billion
to
HK$150.58 billion (Chart 10).
HK$ bn
180
180
170
170
160
160
150
150
140
140
130
30/03 06/04 13/04 20/04 27/04 04/05 11/05 18/05 25/05
130
Government-issued
currency
notes and coins in circulation
11. The
total
amount
of
government-issued
currency
notes and coins in circulation
fell modestly from HK$7.13
billion to HK$7.07 billion
during the reporting period
(Chart 11).
Chart 10
Certificates of Indebtedness
HK$ bn
8.0
Chart 11
Government-issued currency notes
and coins in circulation
8.0
7.6
7.6
7.2
7.2
6.8
6.8
6.4
6.4
6.0
30/03
6.0
06/04 13/04
20/04
27/04 04/05
11/05
18/05 25/05
-6Aggregate Balance
12. The Aggregate Balance
was little changed during the
reporting period to close at
around HK$1.3 billion, with
small fluctuations due to interest
payments on Exchange Fund
paper (Chart 12).
Chart 12
Aggregate Balance
HK$ bn
3.0
(before Discount Window activities)
2.5
3.0
2.5
including EFBN interest payments
2.0
2.0
excluding EFBN interest payments
1.5
1.5
1.0
1.0
0.5
0.5
0.0
30/03 06/04 13/04 20/04 27/04 04/05 11/05 18/05 25/05
0.0
Outstanding Exchange Fund Bills
and Notes
13. The market value of
outstanding Exchange Fund
Bills and Notes rose moderately
from
HK$127.60 billion
to
HK$127.93 billion. Holdings of
Exchange Fund paper by the
banking sector (before Discount
Window activities) increased
slightly from HK$100.74 billion
(78.95% of total) to HK$100.93
billion
(78.89%
of
total)
(Chart 13).
Chart 13
Exchange Fund paper held
by licensed banks
HK$ bn
106
106
102
102
98
98
94
94
90
30/03
90
06/04
13/04
20/04
27/04
04/05
11/05
18/05
25/05
-714. During the period, a total
of HK$476.61 million of interest
payments on Exchange Fund
paper
were
made.
An
additional HK$399.38 million
(in market value) of Exchange
Fund paper was issued to
absorb these interest payments.
The remaining amount was
carried forward in the Aggregate
Balance. All issues of Exchange
Fund paper were well received by
the market (Table 3).
Table 3
Issuance of Exchange Fund Bills and Notes
(19 Apr 06 – 29 May 06)
1-month EFB
3-month EFB
6-month EFB
1-year EFB
2-year EFN
7-year EFN
No. of
issues
launched
3
6
3
1
1
1
Oversubscription ratio
8.25-13.88
2.22-4.75
3.35-4.38
2.60
2.65
3.92
Discount Window activities
15. During the period, eight
banks borrowed a total of
HK$1.95 billion from the
Discount Window, compared
with HK$461 million in the
preceding period (Chart 14). All
borrowings used Exchange Fund
paper as collateral (Table 4).
HK$ bn
2.0
Chart 14
Discount Window borrowing
2.0
1.6
1.6
1.2
1.2
0.8
0.8
0.4
0.4
0.0
30/03 06/04 13/04 20/04 27/04 04/05 11/05 18/05 25/05
0.0
Table 4
Frequency of individual bank’s
access to the Discount Window
(19 Apr 06 – 29 May 06)
Frequency of using
No. of banks
Discount Window
1
2
4
Total
4
3
1
8
-8Backing Portfolio
16. Backing Assets increased
during the period, largely due to
valuation gains, which more than
offset the decline in the Monetary
Base. As a result, the Backing
Ratio increased from 111.68%
on 19 April to 111.97% on
29 May 2006 (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.
%
114
Chart 15
Daily movement of the Backing Ratio
112
112
110
110
108
108
106
Lower Trigger Level
104
Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06
For further enquiries, please contact:
Sara Yip, Manager (Press), at 2878 8246 or
Hing-Fung Wong, Resource Co-ordinator, at 2878 1802
Hong Kong Monetary Authority
4 July 2006
114
Upper Trigger Level
106
104