The overnight cost to borrow in the interbank market soared 253 basis points to 4.14% on Tuesday, its biggest gain since Bloomberg started compiling the data in 2006. — Reuters
HONG KONG: The surge in Hong Kong’s interbank funding rates is being spurred by demand for the local currency amid market volatility and quarter-end needs, the city’s monetary authority says.
The overnight cost to borrow in the interbank market soared 253 basis points to 4.14% on Tuesday, its biggest gain since Bloomberg started compiling the data in 2006. The one-month gauge increased by 51 basis points, the most since the global financial crisis in 2008.
The cash squeeze came after Credit Suisse Group AG’s takeover roiled the city’s stock market on Monday, with HSBC Holdings Plc plunging more than 6% amid concern over Additional Tier-1 bonds.
Uncertainty over the US Federal Reserve’s (Fed) impending rate decision may be adding to volatility. The Hong Kong dollar is pegged to the greenback.
“As the US has continued to raise interest rates since March last year, the Hong Kong dollar interbank rates have gradually risen,” the Hong Kong Monetary Authority (HKMA) said in an emailed statement on Tuesday, adding that rates were also driven by “market demand for Hong Kong dollar funding”.
“Recently, relevant factors include stock market activities, quarter-end seasonal funding demand, and external market volatility,” the statement said.
The one-month Hong Kong interbank offered rate, known as Hibor, has lagged behind its US counterpart. The difference in yield made shorting the Hong Kong dollar against the greenback profitable, known as the carry trade.
Intervention by the HKMA to stop the currency from depreciating past the weak end of its band has mopped up cash in the banking system.
The aggregate balance, the gauge of interbank liquidity, has shrunk by more than 80% since its peak in 2021 to 77 billion Hong Kong dollars (RM43.9bil), the lowest level in almost three years.
Speculation that the Fed will slow the pace of interest rate increases may be prompting traders to unwind the carry trade, boosting demand for Hong Kong dollars, according to a trader.
In addition to diminished interbank liquidity, market players, including some Chinese institutions, were less willing to offer Hong Kong dollar funding, resulting in a higher funding rate, the trader said.
“The Hong Kong dollar market is continuing to operate in a smooth and orderly manner,” the HKMA said.
The drama comes as Hong Kong hosts its busiest week for global events since the pandemic began.
Among the events taking place are the Credit Suisse Asian Investment Conference, the HKMA-BIS Joint Conference of central bankers, a family office event entitled “Wealth for Good in Hong Kong Summit”, as well as the Art Basel fair. — Bloomberg
