Hong Kong’s costly defense of its currency peg is starting to affect interbank rates.
The Hong Kong Monetary Authority (HKMA) has mopped up HK$51.3 billion (US$6.54 billion) of local dollars since the currency hit the weak end of its trading band a week ago for the first time since 2005.
The purchases, which will cut the aggregate balance of liquidity by about 30 percent, helped push up the three-month borrowing cost to its highest level since December 2008.
HOUSING MARKET
While rates remain relatively low, with the three-month rate still 1 percentage point below its US equivalent, risks to the territory’s bubbly housing market are rising.
Home prices have more than doubled in the past decade as swelling inflows kept borrowing costs low. Diminishing liquidity might prompt banks to finally lift mortgage costs.
TRADER REACTION
“The pace of intervention has been faster than what we’ve expected and the aggregate balance would drop to zero in two weeks if this continues,” said Ngan Kim Man (顏劍文), deputy head of treasury at China Everbright Bank Co’s (光大銀行) Hong Kong branch. “Traders are worried that such decline of liquidity in the banking system may lead to a spike in Hong Kong dollar rates.”
The scale of the HKMA’s buying might spur traders to unwind arbitrage positions, providing short-term support to the Hong Kong dollar, before the currency weakens again, Ngan said.
The Hong Kong dollar moved away from the HK$7.85 level that marks the limit of its band against the greenback yesterday, rising as much as 0.07 percent before paring gains to 0.03 percent.
The HKMA’s purchases of Hong Kong dollars have been smooth and sound, and the size of the outflows is not too big, HKMA Deputy Chief Executive Howard Lee (李達志) said in a news briefing.
The de facto central bank does not see large-scale shorting of the currency, and the slowly climbing interbank rates would continue to rise, he said.
INTERBANK RATE
Hong Kong’s three-month interbank offered rate, known as HIBOR, rose to 1.34 percent, almost double last year’s low of 0.75 percent. The 12-month rate climbed to 2.14 percent.
“HIBOR will rise at a faster pace from here with liquidity continuing to shrink amid month-end effects and potential initial public offerings,” said Eddie Cheung (張敬勤), Asia FX strategist at Standard Chartered Bank (Hong Kong) Ltd.
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