EXCHANGE FUND ADVISORY COMMITTEE
CURRENCY BOARD SUB-COMMITTEE
Report on Currency Board Operations
(29 June 2006 – 26 July 2006)
The Hong Kong dollar exchange rate weakened, reflecting
interest rate arbitrage activities during the reporting period.
Interbank interest rates eased and their negative spreads
against US dollar rates widened. The Monetary Base
declined from HK$285.82 billion to HK$285.47 billion,
largely because of decreases in Certificates of Indebtedness.
In accordance with Currency Board principles, changes in
the Monetary Base were fully matched by corresponding
changes in foreign reserves.
Hong Kong dollar exchange rate
1.
The Hong Kong dollar
exchange rate softened from
7.7679 to 7.7785 during the
reporting
period,
reportedly
relating to interest rate arbitrage
activities to take advantage of
wider negative interest rate
differentials
(Chart
1).
Meanwhile,
the
effective
exchange rate of the Hong Kong
dollar eased slightly, reflecting
weakness in the US dollar
(Chart 2).
Chart 1
Hong Kong dollar exchange rate
(closing rate)
HK$/US$
7.89
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
7.73
Strong-side Convertibility Undertaking
7.71
7.71
30/05 06/06 13/06 20/06 27/06 04/07 11/07 18/07 25/07
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 03
93
Jul 03
Jan 04
Jul 04
Jan 05
Jul 05
Jan 06
Jul 06
-2-
Interest rates
2.
Hong
Kong
dollar
interbank
interest
rates
declined during the reporting
period. The one-month HIBOR
decreased by 26 basis points to
close at 3.98%. The three-month
and 12-month HIBORs decreased
by 25 basis points and 24 basis
points to close at 4.40% and
4.86% respectively (Chart 3).
3.
Interest rate volatility, as
measured
by
the
standard
deviation of daily changes in onemonth HIBOR, rose in July. The
standard deviation as a ratio of
the average level of one-month
HIBOR also increased slightly
(Chart 4). 1
4.
Negative spreads of Hong
Kong dollar interest rates over
the US dollar counterparts
widened during the reporting
period. The one-month and threemonth spreads widened by 29
basis points and 24 basis points
to –142 basis points and –112
basis points respectively. The 12month spread widened by 10
basis points to close at –78 basis
points (Chart 5).
1
Chart 3
% p.a.
HIBORs
6.4
6.4
5.6
5.6
4.8
4.8
4.0
4.0
3.2
3.2
2.4
2.4
1-month
3-month
12-month
1.6
1.6
0.8
0.8
0.0
0.0
-0.8
-0.8
30/05 06/06 13/06 20/06 27/06 04/07 11/07 18/07 25/07
Chart 4
Interest rate volatility
1.4
1.2
1.0
0.8
0.6
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
Jul 03
Jan 04
Jul 04
Jan 05
Jul 05
Jan 06
0.0
Jul 06
Chart 5
Hong Kong dollar - US dollar
interest rate spreads
% p.a.
0.6
0.3
1-month
3-month
0.6
0.3
12-month
0.0
0.0
-0.3
-0.3
-0.6
-0.6
-0.9
-0.9
-1.2
-1.2
-1.5
30/05
-1.5
06/06
13/06
20/06
27/06
04/07
11/07
18/07
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.
25/07
-35.
In line with the movements
in interest rate spreads, the Hong
Kong dollar 12-month forward
discount increased by 78 pips to
close at 583 pips, and the threemonth forward discount widened
by 47 pips to close at 221 pips
(Chart 6).
6.
The yields of Exchange
Fund paper decreased acrossthe-board during the period
(Chart 7). The negative yield
spreads against US Treasuries
widened at the short end, but
narrowed at the long end. In
particular, the three-month spread
rose to -140 basis points, while
the five-year and 10-year spreads
decreased to -46 basis points and
-35 basis points respectively at
the end of the period (Table 1).
7.
Following an increase of
25 basis points in the US federal
funds target rate, the HKMA
Base Rate was adjusted upward
by 25 basis points to 6.75% on
30 June 2006 according to the
established formula (Chart 8).
However, banks kept their Best
Lending Rates unchanged.
Chart 6
Hong Kong dollar forward points
pips
200
0
200
0
3-month
-200
-200
12-month
-400
-400
-600
-600
30/05 06/06 13/06 20/06 27/06 04/07 11/07 18/07 25/07
Chart 7
% p.a.
Exchange Fund paper yield curves
9
8
end-Jun 97
7
6
28 Jun 06
5
4
3
26 Jul 06
2
1
0
-1
1 7Y 8Y 9Y
1W 1Y 2Y 3Y 4Y Table
5Y 6Y
9
8
7
6
5
4
3
2
1
0
-1
10Y
Yield spreads of Exchange Fund paper over
US Treasuries (basis points)
27 Jun 97
28 Jun 06
26 Jul 06
3-month
1-year
3-year
5-year
10-year
56
21
3
27
54
-87
-76
-56
-47
-37
-140
-96
-61
-46
-35
Chart 8
Base Rate and overnight HIBOR
% p.a.
8
8
federal funds target rate + 150bps
7
7
6
6
5
5
4
4
3
3
Closing O/N HIBOR
2
2
Simple average of 5-day moving
averages of O/N & 1M HIBORs
1
0
30/05
1
0
06/06
13/06
20/06
27/06
04/07
11/07
18/07
25/07
-48.
The average one-month
time deposit rate offered by
major authorized institutions
remained unchanged at 2.769%
during the period. 2 Meanwhile,
the
effective
deposit
rate
increased from 2.29% to 2.49% in
June (Chart 9). 3 The composite
interest rate, which reflects the
average cost of funds of banks,
declined from 3.39% at the end of
May 2006 to 3.16% at the end of
June 2006. 4
% p.a.
2.8
Chart 9
Effective Hong Kong dollar deposit rate
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
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, decreased slightly from
HK$285.82 billion to HK$285.47
billion during the reporting period
(Table 2).
Movements in the
individual
components
are
discussed below.
2.8
Table 2
Monetary Base
(HK$ bn)
29 Jun 06
26 Jul 06
CIs
Government-issued
Currency Notes and
Coins in Circulation
Aggregate Balance
Outstanding EFBNs
149.40
7.05
148.31
7.04
1.32
128.06
1.30
128.82
Monetary Base
285.82
285.47
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.
-5Certificates of Indebtedness
10. During the reporting period,
the three note-issuing banks
redeemed from the HKMA a total
of HK$1.09 billion of CIs in
exchange for US$0.14 billion.
As a result, the outstanding
amount of CIs decreased from
HK$149.40 billion
to
HK$148.31 billion (Chart 10).
HK$ bn
180
180
170
170
160
160
150
150
140
140
130
130
30/05 06/06 13/06 20/06 27/06 04/07 11/07 18/07 25/07
Government-issued
currency
notes and coins in circulation
11. The
total
amount
of
government-issued
currency
notes and coins in circulation
was virtually unchanged at
HK$7.04 billion at the end of the
reporting period (Chart 11).
Chart 10
Certificates of Indebtedness
HK$ 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
30/05
6.0
06/06
13/06
20/06
27/06
04/07
11/07
18/07
25/07
Aggregate 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
2.5
2.0
(before Discount Window activities)
including EFBN interest payments
excluding EFBN interest payments
3.0
2.5
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
30/05 06/06 13/06 20/06 27/06 04/07 11/07 18/07 25/07
-6Outstanding Exchange Fund Bills
and Notes
13. The market value of
outstanding Exchange Fund
Bills and Notes rose moderately
from
HK$128.06 billion
to
HK$128.82 billion. Holdings of
Exchange Fund paper by the
banking sector (before Discount
Window activities) increased
from HK$97.52 billion (76.15% of
total)
to
HK$98.12
billion
(76.17% of total) (Chart 13).
14.
During the period, a total of
HK$225.75 million of interest
payments on Exchange Fund
paper were made. Taking into
account interest payments carried
forward from the last reporting
period, an additional HK$241.63
million (in market value) of
Exchange Fund paper was
issued to absorb these interest
payments.
All
issues
of
Exchange Fund paper were well
received by the market (Table 3).
Chart 13
Exchange Fund paper held
by licensed banks
HK$ bn
106
106
102
102
98
98
94
94
90
30/05
90
06/06
13/06
20/06
27/06
04/07
11/07
18/07
25/07
Table 3
Issuance of Exchange Fund Bills and Notes
(29 Jun 06 – 26 Jul 06)
1-month EFB
3-month EFB
6-month EFB
1-year EFB
No. of
issues
launched
1
4
2
1
Oversubscription ratio
7.92
3.27-4.25
3.60-3.77
3.05
-7Discount Window activities
15. During the period, four
banks borrowed a total of
HK$653 million from the
Discount Window, compared
with HK$1.13 billion in the
preceding period (Chart 14). All
borrowings used Exchange Fund
paper as collateral (Table 4).
2.0
1.6
1.6
1.2
1.2
0.8
0.8
0.4
0.4
0.0
0.0
30/05 06/06 13/06 20/06 27/06 04/07 11/07 18/07 25/07
Backing Portfolio
16. Backing Assets increased
in the early part of the reporting
period, attributable to valuation
gains. As the Backing Assets
increased proportionally more
than the Monetary Base, the
Backing Ratio increased from
112.08% on 29 June to 112.52%
on 13 July, surpassing the
Upper Trigger Level of 112.5%.
Pursuant to the arrangement
approved by the Financial
Secretary in January 2000,
assets were transferred out of
the backing portfolio to reduce
the Backing Ratio to around
110% on 14 July (Chart 15).
Thereafter, the Backing Ratio
continued to rise and closed at
110.29% at the end of the period.
Under the Linked Exchange Rate
system, while specific Exchange
Fund assets have been designated
for the Backing Portfolio, all
Exchange
Fund
assets
are
Chart 14
Discount Window borrowing
HK$ bn
2.0
Table 4
Frequency of individual bank’s
access to the Discount Window
(29 Jun 06 – 26 Jul 06)
Frequency of using
No. of banks
Discount Window
1
2
Total
%
114
3
1
4
Chart 15
Daily movement of the Backing Ratio
114
Upper Trigger Level
112
112
110
110
108
108
106
104
Jan 03
106
Lower Trigger Level
104
Jul 03
Jan 04
Jul 04
Jan 05
Jul 05
Jan 06
Jul 06
-8available to support the Hong
Kong dollar exchange rate.
For further enquiries, please contact:
Hing-Fung Wong, Officer (Press), at 2878 1802 or
Thomas Chan, Senior Manager (Press), at 2878 1480
Hong Kong Monetary Authority
4 September 2006