The cost for banks to borrow Hong Kong dollars from each other for a month rose to the highest level since 2007 after prolonged currency intervention shrank the city’s liquidity pool and demand for cash climbed toward quarter-end.
(Bloomberg) — The cost for banks to borrow Hong Kong dollars from each other for a month rose to the highest level since 2007 after prolonged currency intervention shrank the city’s liquidity pool and demand for cash climbed toward quarter-end.
The one-month Hong Kong interbank offered rate for the local currency — known as Hibor — increased eight basis points to 5.10%, having more than doubled from this year’s low set in February. The gauge’s discount to the US dollar interbank rate has now almost vanished, making the once popular bearish-Hong Kong dollar strategy less appealing.
While higher funding costs will help Hong Kong authorities curb bearish bets on the city’s currency and maintain its peg to the dollar, a sustained increase may threaten the nascent economic recovery. The one-month tenor of Hibor is a reference rate for mortgage loans, so a further advance may pose a risk to the property sector.
Hong Kong dollar Hibor has become more volatile this year as the authorities have spent about $6.5 billion in currency intervention since February, reducing a gauge of interbank liquidity known as the aggregate balance to the lowest since 2008.
“Though HKD rates may not keep going up in a straight line, the overall uptrend remains intact ahead of half-year end with one-month Hibor closing the gap with one-month dollar Libor” said Carie Li, global market strategist at DBS Bank in Hong Kong, adding that she doesn’t rule out the Hong Kong dollar gaining to 7.80 per greenback this month.
The challenge for the authorities began when US money-market rates surged above their Hong Kong equivalents, luring hedge funds to profit on the difference. The spread between the two became wide enough for funds to borrow Hong Kong dollars cheaply and buy the higher-yielding greenback.
The popular trading strategy helped push the local currency to the weaker end of its 7.75-7.85 peg with its US counterpart, triggering the need for official intervention. The Hong Kong dollar dropped 0.1% to 7.8224 per dollar Tuesday afternoon.
Higher rates would add to challenges to the city’s economy that emerged from a recession as the opening of city borders revived spending.
“The rising interest rate, on top of China’s growth slowdown, will be increasingly negative for the Hong Kong economy as it tightens economic conditions generally,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore. “Higher rates would be particularly negative for the property sector,” he said.
That said, analysts expect the liquidity to loosen again next month after the seasonal demand abates.
“Next week is the second highest week in terms of weekly dividend payments with HK$104 billion ($13.3 billion) expected to be paid out, so funding demand is tightening leading into that,” said Eddie Cheung, senior emerging markets strategist at Credit Agicole CIB Hong Kong Branch. “I expect some of the surge to be pared back in July,” he said.
(Updates with analyst comment in fifth and 11th paragraphs.)
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