Hong Kong Interbank Rates Seen Staying High, Buoying Dollar

© Bloomberg. The Bank of China Tower, left, Citibank Tower, second left, and Cheung Kong Center, right, stand in the Central district of Hong Kong. Photographer: Brent Lewin

(Bloomberg) — Hong Kong borrowing costs are expected to remain stubbornly high over the rest of the quarter, supporting the local currency.

That’s according to Carie Li, an economist at OCBC Wing Hang Bank Ltd., who says the city’s shrinking cash pool is making banks more reluctant to lend. The one-month interbank rate, known as Hibor, has climbed to 2.11 percent, up from a low of 0.91 percent in late February. She cited dividend payments lenders make from May to July and a need to hold cash near the end of the first half to meet ratio requirements as likely to put further upward pressure on borrowing costs.

Rates have risen after the Hong Kong Monetary Authority spent HK$22.1 billion ($2.8 billion) buying local dollars in March as the local currency fell beyond the weak end of its trading band against the greenback. The intervention reduced the aggregate balance, the city’s pool of cash, to almost HK$55 billion. The previously wide gap between Hong Kong and U.S. rates had made the city’s currency attractive to short.

“The aggregate balance has fallen to a level that’s not comfortable for some banks,” Li said. “They’ve tried to hoard cash and they won’t want to lend much in the interbank market so they are well prepared for upcoming seasonal events.”

The following charts show how pressure on the Hong Kong dollar to weaken has eased:

Hong Kong’s aggregate balance has dropped to its lowest since November 2008. Intervention last year more than halved the cash pool, and it fell further with the de facto central bank’s buying of Hong Kong dollars in March.

Back in February the Hong Kong dollar’s borrowing costs were the lowest relative to the greenback’s since 2008. That gap had been fueling weakness in the Hong Kong dollar as traders sold it and put the proceeds in the higher-yielding dollar. With the one-month Hibor recently rising to the highest of the year, that pressure on the local currency to weaken has eased.

Borrowing costs pushed higher by HKMA intervention have helped the Hong Kong dollar inch away from the weak end of its trading band since the end of March. The currency strengthened about 0.07 percent in April, the first gain in five months. It was little changed at 7.8454 per dollar as of 10:21 a.m. on Thursday.

The Hong Kong dollar’s one-month forward points remain near the highest in seven months, reflecting tighter liquidity. This also means that traders face higher costs to build bearish bets on the Hong Kong dollar.

(Adds Hong Kong dollar move.)

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