Hong Kong Rates Reach 2008 High After $6.5 Billion Intervention

(Bloomberg) -- Hong Kong’s costly defense of its currency peg is starting to impact interbank rates.

The Hong Kong Monetary Authority has mopped up HK$51.3 billion ($6.5 billion) of local dollars since the currency hit the weak end of its trading band a week ago for the first time since 2005. The purchases, which will cut the aggregate balance of liquidity by about 30 percent, helped push up the three-month borrowing cost to its highest level since December 2008.

While rates remain relatively low, with the three-month rate still 1 percentage point below its U.S. equivalent, risks to the city’s bubbly housing market are rising. Home prices have more than doubled in the past decade as swelling inflows kept down borrowing costs. Diminishing liquidity may prompt banks to finally lift mortgage rates.

“The pace of intervention has been faster than what we’ve expected, and the aggregate balance will drop to zero in two weeks if this continues,” said Ngan Kim Man, deputy head of treasury at China Everbright Bank Co.’s Hong Kong branch. “Traders are worried that such a decline in liquidity in the banking system may lead to a spike in Hong Kong dollar rates.”

Hong Kong Rates Reach 2008 High After $6.5 Billion Intervention

The scale of the HKMA’s buying may spur traders to unwind arbitrage positions, providing a short-term support to the Hong Kong dollar before the currency weakens again, Ngan said.

The Hong Kong dollar moved away from the HK$7.85 limit of its band against the greenback on Thursday, rising as much as 0.07 percent before paring gains to 0.02 percent. It was trading at HK$7.8485 against the greenback as of 5:04 p.m.

The HKMA’s purchases of Hong Kong dollars have been orderly and outflows aren’t too big, HKMA Deputy Chief Executive Howard Lee said in a press briefing Thursday. The de facto central bank doesn’t see large-scale shorting of the currency, and the slowly climbing interbank rates will continue to rise, he said.

Lee helped alleviate concerns over cash supply, saying banks can acquire funding from the HKMA’s discount window with their exchange fund bills, and the monetary authority could also redeem some debt to release cash when liquidity is too tight. The outstanding volume of exchange fund bills and notes stood at HK$1.05 trillion at the end of February.

The local government doesn’t see the currency or the city’s stock market under any malicious attacks, Radio Television Hong Kong reported, citing James Lau, secretary for Financial Services and the Treasury.

Hong Kong Rates Reach 2008 High After $6.5 Billion Intervention

The three-month interbank rate -- known as Hibor -- rose to 1.34 percent, almost double last year’s low of 0.75 percent. The 12-month rate advanced to 2.14 percent.

“Hibor will rise at a faster pace from here with liquidity continuing to shrink amid month-end effects and potential initial public offerings,” said Eddie Cheung, Asia FX strategist at Standard Chartered Bank (HK) Ltd.

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