Hong Kong interbank rate jumps as HKMA defense hits USD4.3b

The Hong Kong dollar’s interbank borrowing costs rose to their highest level this year, as the city’s de facto central bank bought more of the currency to defend its peg to the greenback.

The three-month interbank rate – known as Hibor – climbed for a fourth day to reach 1.32 percent, the highest since Dec. 27, as the Hong Kong Monetary Authority took its buying of the local dollar since last week to HKD33.7 billion (USD4.3 billion). More than half of the purchases have taken place within the past two days. The gap between Hibor and the interest rate on the greenback stayed around one percentage point, which still makes shorting the Hong Kong dollar attractive.

“The pace of Hong Kong dollar buying is not particularly aggressive relative to history,” said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. “To defend the linked exchange rate system, the HKMA could also sell extra exchange fund bills.”

Traders are increasingly pricing in higher borrowing costs. One-year interest rate swaps climbed for a fifth day, hitting 1.94 percent, the highest since December 2008. The Hong Kong dollar was little changed at HKD7.8499 per greenback, next to the end of its permitted trading band, as of 6:12 p.m. local time. The city’s aggregate balance of interbank liquidity will fall to HKD146.2 billion on April 19, according to the HKMA.

“Around mid-2018, dividend payment flows, potential large initial public offerings, quarter-end effects and a possible June rate hike by the Federal Reserve may add more upward pressure to the Hibor,” said Carie Li, an economist at OCBC Wing Hang Bank in Hong Kong. She expects three-month Hibor to rise to 1.65 percent by the end of this year, slowing the buildup in short positions and helping the currency strengthen to HKD7.83. Bloomberg