Hong Kong Rates Jump to Highest Since Financial Crisis

The cost for banks to borrow Hong Kong dollars from one another for a month soared to its highest level since 2007. This is because the city's liquidity pool was reduced by protracted currency intervention, and demand for cash increased as the quarter came to a close.

Since its low point for the year in February, the local currency's one-month Hibor (Hong Kong interbank offered rate) has grown dramatically, rising by more than four times to 5.10%. The once-popular bearish-Hong Kong dollar approach is less enticing because the gauge's discount to the interbank US dollar rate has almost completely disappeared.

Higher finance costs will aid Hong Kong authorities in reducing bets against the city's currency and preserving its peg to the dollar, but a steady rise could endanger the economy's fledgling recovery. A further climb could be risky for the real estate market because the one-month tenor of Hibor serves as a reference rate for mortgage loans.

The Hong Kong dollar has been more volatile this year as a result of the government's $6.5 billion in currency intervention since February, which has caused the aggregate balance, a measure of interbank liquidity, to drop to its lowest level since 2008.

Carie Li, global market strategist at DBS Bank in Hong Kong, stated that although HKD rates may not continue to rise in a straight line, the overall upward trend is still present as we approach the halfway point of the year. One-month Hibor is closing the gap with one-month dollar Libor.

When US money-market rates soared beyond their Hong Kong equivalents, inviting hedge funds to profit on the gap, the challenge for the regulators started. The difference between the two grew to be sufficiently large for money to purchase the higher-yielding currency by taking out inexpensive Hong Kong dollar loans.

The widely used trading method contributed to the lower end of the local currency's 7.75–7.85 peg with the US counterpart, necessitating official intervention. Tuesday afternoon, the Hong Kong dollar decreased 0.1% to trade at $7.8224.

Increased charges would make the city's economy, which had just recovered from a recession thanks to the opening of its borders, even more difficult to manage.

Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore, predicted that the tightening of economic conditions overall and China's slowing development would have an increasingly detrimental impact on the Hong Kong economy. Higher rates, according to him, would be especially harmful to the real estate industry.

Analysts predict that as the seasonal demand declines the next month, the liquidity will loosen once more.

According to Eddie Cheung, senior emerging markets analyst at Credit Agricole CIB Hong Kong Branch, next week is likely to have the second-highest amount of weekly dividend payments, with HK$104 billion ($13.3 billion) expected to be paid out. As a result, funding demand is becoming more constrained in the weeks leading up to that. In July, he predicted that some of the increase would be reduced.