HONG KONG: Hong Kong’s short-term borrowing costs haven’t been this high for a decade, and the impact is starting to show on the city’s financial markets.
The tightness has weighed on demand for stocks at a time when street clashes have undercut sentiment toward the city’s assets. A gauge of Hong Kong property companies tumbled the most in five months on Wednesday as police fired tear gas and rubber bullets to clear roads.
The currency soared as the cost of shorting became prohibitive. And the city’s interest rate swap curve is inverted by the most since 1999.
Explanations for the diminishing liquidity include typical demands for cash ahead of the quarter-end as banks hoard funds for regulatory checks and companies pay dividends.
The planned listing of Alibaba Group Holding Ltd. may also be spurring investors to set aside cash in anticipation. There’s also concern that the controversial extradition bill, if it passes, could spur capital outflows and reduce liquidity further.
“The local political situation and uncertainty over the escalating China-U.S. trade tensions may have triggered outflow concerns, which could also lead to tighter liquidity,” said Irene Cheung, senior strategist at Australia & New Zealand Banking Group Ltd.
The cash squeeze has pushed the one-month interbank borrowing cost, known as Hibor, above the 12-month tenor for the first time in more than a decade. The tightening caused by lenders’ hoarding of funds is also magnified by a dwindling liquidity pool -- the aggregate balance has halved over the past year as local authorities defended the city’s currency.
The Hong Kong dollar jumped the most since November on Wednesday as borrowing costs spiked, before weakening again. The currency traded near the weak end of its permitted trading band against the greenback for much of the year, compelling the city’s monetary authority to spend HK$22.1 billion ($2.8 billion) intervening it in March. The Hong Kong dollar was little changed at 7.8287 as of 2:12 p.m. local time.
The tightness isn’t limited to the interbank market. The Hong Kong dollar’s 12-month forward points, a gauge of borrowing costs in the foreign-exchange market, touched the highest since January 2017. This also means that shorting the currency has become a lot more expensive.
The jump in one-month Hibor has driven it above the level of its U.S. counterpart. When the gap between the Hibor and Libor was wide, it was attractive for investors to sell Hong Kong dollars to buy U.S. assets -- a phenomenon that weakened the currency.
Hong Kong’s one-year interest rate swaps have climbed to as high as 2.22%, expanding the premium against five-year contracts to the largest since January 1999. While seasonal factors and big IPOs may keep short-tenor contracts elevated, global easing and few worries about outflows given Hong Kong’s large reserves have kept long-end swaps from rising, according to OCBC Wing Hang Bank Ltd. economist Carie Li. - Bloomberg
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