Hong Kong Interbank rate drops as HKMA cuts back on intervention

HONG KONG'S benchmark borrowing cost is set to fall this week for the first time since April, as the city's de-facto central bank stopped draining cash from the financial system to defend its currency peg. The relief may not last.

The 3-month Hong Kong Interbank Offered Rate, or Hibor, has dropped 1.4 per cent so far this week. The city's monetary authority hasn't intervened in the foreign exchange market since Jun 23 as the Hong Kong dollar edged back from the weak end of its 7.75-to-7.85 per greenback trading band.

Inflows into local stocks on easing Covid curbs and Chinese President Xi Jinping's visit to the city have provided a brief boost the currency. Analysts though expect the Hong Kong dollar peg to come under pressure again with the Federal Reserve forecast to hike by 75 basis points later this month, which would spur the HKMA to drain liquidity.

The 3-month Hibor may rise to as high as 3 per cent during the Fed's rate-hike cycle, according to DBS Bank. "With the Fed further raising rates, it is inevitable for the US-Hong Kong yield differential to widen and boost carry trade," according to Carie Li, global market strategist.

The 3-month Hibor has eased 2 basis points from a 2-year high of 1.75 per cent touched on Monday (Jul 4). Apart from the pullback in Treasury yields this week on recession fears, a busy IPO pipeline is also dragging down Hibor even as the HKMA's aggressive interventions last month reduced the city's aggregate balance.

"Hong Kong dollar rates often come off after the quarter-end," said Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank. Seasonal factors such as higher demand for Hong Kong dollar from corporates for dividend payments and the recent inflows into the equity market have helped, he said.

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However, most analysts expect this respite to be temporary. The 3-month Hibor will probably move toward 2 per cent at the end of the third quarter, Cheung said. BLOOMBERG