Hong Kong interbank liquidity near three-year low on peg defence

HONG Kong’s interbank liquidity is approaching the lowest level in three years following a series of intervention by the city’s de facto central bank to defend the local currency’s peg to the dollar.

The Asian financial hub’s aggregate balance stands at HK$57.2 billion (S$9.7 billion) on Friday (Apr 14), a whisker away from the HK$54 billion floor seen in much of 2019 and early 2020. The pool of cash has shrunk after the Hong Kong Monetary Authority (HKMA) bought HK$20 billion worth of the local currency this month to keep its value within the 7.75-7.85 per dollar-trading band.

Liquidity will likely keep tightening at least into May with the Federal Reserve seen raising policy rates then, keeping the HKMA under pressure to intervene from time to time. The squeeze may worsen later this year due to summer dividend payouts and a potential rush of Chinese stock listings, fuelling volatility in local money market rates.

“Aggregate balance will only bottom out after the end of the Federal Reserve’s rate hike cycle,” said Carie Li, global market strategist at DBS Bank in Hong Kong, adding the measure of liquidity may touch a low of around HK$40 billion. “With such low liquidity, the main concern would be large volatility in HKD market, especially given the uneven distribution of HKD liquidity across the banking system.”

In March, the cost to borrow overnight in Hong Kong jumped by the most in at least 17 years before receding. Still, at 1.84 per cent, the rate is far below the US equivalent which stood at 4.8 per cent on Wednesday.

In addition to a shrinking aggregate balance, an expected revival of initial public offerings by Chinese technology giants and the seasonal dividend payments in the summer could send money market rates higher, according to Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong.

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On the currency front, the Hong Kong dollar will likely back away from the weak end of its band in the second half given the prospect of narrowing US-Hong Kong interest rate differential, according to both DBS and Standard Chartered Bank.

“We see the possibility of the HKD regaining to a more steady footing after the Fed is done with hiking rates, allowing US interbank rates to start coming off more evidently in the second half of 2023,” said Kelvin Lau, senior economist at Standard Chartered Bank in Hong Kong. BLOOMBERG