Hong Kong dollar interbank rates could meet or overshoot US rates, says HKMA

HONG Kong dollar interbank rates could catch up with, or even overshoot their US dollar counterparts as companies’ demand for the local currency for dividend payments peaks in the three months to August, the head of the city’s central bank said.

This is a seasonal factor unique to Hong Kong that affects the city’s interbank rates, as listed companies need to stock up on Hong Kong dollars to pay dividends, said Hong Kong Monetary Authority’s (HKMA) chief executive Eddie Yue in an “Insight” article published on its website on Wednesday (Jun 14).

The peak season for dividend payments is usually in June to August. Such funding demand sends the Hong Kong dollar exchange rate higher, he said.

Such seasonal factors will continue to influence interbank rates in the coming weeks or months, Yue said.

“The possibility that HKD interbank rates will catch up with, or even overshoot, their USD counterparts on certain days cannot be ruled out,” said Yue.

The Hong Kong dollar was up 30 pips on Wednesday, at 7.8308 per US dollar and the highest in two weeks.

The Hong Kong overnight interbank offered rate reversed two straight days of decline and rose to 3.88 per cent, the highest since May 30, after having peaked at nearly 5 per cent on May 19 at a nearly 16-year high.

Seasonal factors aside, Hong Kong’s interbank rate is affected by the US interest rate trend due to the Hong Kong dollar’s peg to the greenback. The Hong Kong dollar is pegged within a band of 7.75 to 7.85 versus the US dollar.

A widening of the interest rate gap between the Hong Kong dollar and US dollar had incentivised carry trades and weakened the Hong Kong dollar, thereby leading to over 40 rounds of intervention by the HKMA since the US Federal Reserve began hiking rates in March 2022 up to May. REUTERS