HK interbank liquidity shrinks towards lowest since 2008

Hong Kong interbank liquidity shrinks towards lowest since 2008

 

WED, APR 19, 2023 - 11:09 AM

 

HONG Kong’s interbank liquidity is falling towards its lowest level since the global financial crisis, as a wide gap between local and US interest rates forces the Asian financial hub to use frequent market interventions to defend its currency’s value.

The city’s aggregate balance is set to drop to HK$49.2 billion (S$8.36 billion) on Thursday (Apr 20) when the Hong Kong Monetary Authority settles its earlier purchase of HK$6.9 billion to keep the local dollar’s peg to the US currency intact. The key gauge of interbank liquidity already has shrunk about 90 per cent from its peak in 2021.

Selling in the Hong Kong dollar has persisted this month as local short-term interest rates remain far below their counterparts in the US, where the Federal Reserve has been aggressively tightening policy for over a year. This has put pressure on the HKMA to intervene from time to time to prevent the local currency from drifting outside its 7.75-7.85 per dollar trading band.

“As the balance drops towards zero, which is possible and not an issue as this was the case before the global financial crisis, Hibors will eventually have to rise and catch up with US rates,” said Stephen Chiu, chief Asia FX & rates strategist at Bloomberg Intelligence, referring to the Hong Kong Interbank Offered Rate. “Only a quick reversal in the Fed’s policy stance could help avoid this, yet this remains unlikely.” BLOOMBERG