The cost for banks to borrow Hong Kong dollars from one another for a month increased to its highest level since 2007, as the city’s liquidity pool was reduced by protracted currency intervention and demand for cash increased as the quarter came to a close.
The local currency’s one-month Hibor (Hong Kong interbank offered rate), which has more than quadrupled from this year’s low recorded in February, climbed eight basis points to 5.10%. The once-popular bearish-Hong Kong dollar approach is now less enticing since the gauge’s discount to the interbank US dollar rate has almost completely disappeared.
Higher finance costs may aid Hong Kong authorities in reducing wagers against the city’s currency and preserving its peg to the dollar, but a steady rise might endanger the economy’s fledgling recovery. A further climb might be risky for the real estate market since the one-month tenor of Hibor serves as a reference rate for mortgage loans.
When US money-market rates soared beyond their Hong Kong equivalents, inviting hedge funds to profit from 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 equivalent, necessitating state intervention. Tuesday morning, the Hong Kong dollar decreased 0.1% to trade at $7.8213.
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.
According to Alvin Tan, director of Asia FX strategy at RBC Capital Markets in Singapore, “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.” Higher rates, according to him, would be especially harmful to the real estate industry.
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