Hong Kong’s short-term funding costs have come off their highs this week, with analysts saying local interest rates look to be peaking after they spiked higher last month.
The overnight Hong Kong interbank offered rate, the shortest tenor of so-called Hibor, has tumbled 158 basis points for this week through Thursday, heading for the steepest weekly decline since May. The gauge had climbed to this highest level this year on Monday.
The swift reversal in Hibor is helping to support the Hong Kong dollar as the extra volatility has increased the uncertainty of trades betting against the currency. That’s offering a respite to the authorities who have fought in recent months to defend the currency’s peg to the US dollar.
“It looks like Hibor rates are peaking out,” said Samuel Tse, a senior economist at DBS Bank in Hong Kong. The increase in Hibor was “somewhat a result of overshooting due to the unwinding of carry trades”, and now this impact is easing, Hibor should retreat, he said.
Overnight Hibor edged up 12 basis points on Thursday to 2.42%, but it is still down from this year’s high of 4.65% on Monday, based on data compiled by Bloomberg. The one-month gauge has fallen 33 basis points this week to 2.97%, while the three-month rate has slipped 22 basis points to 3.08%.
See also: Hong Kong’s biggest developer Sun Hung Kai profit rises slightly as property market recovers
One of the drivers behind the rising volatility in local funding costs has been the central bank’s efforts to defend the currency peg. The HKMA has bought at least HK$120 billion ($19.83 billion) of the local currency since the start of June, and those interventions have shrunk the aggregate balance, which is the total amount of cash that banks hold at the authority, and a key measure of interbank liquidity.
This year’s rally in Hong Kong stocks is also having an influence on local funding costs. The equity gains are attracting money from mainland investors, who need to buy the local currency to finance their purchases, which is also reducing local liquidity levels.
Hibor ceiling
See also: Hong Kong Exchange posts record profit on IPO, trading surge
There’s limited room for further Hibor gains due to tepid economy, with the three-month rate having a ceiling of around 3.55%, according to JPMorgan Chase & Co.
“While upside risks in local rates remain from current levels, there is some limit to how high they should go in light of the still weak domestic fundamentals,” said Tiffany Wang, a strategist at JPMorgan in Hong Kong. They are unlikely to go “materially higher from here”, she said.
The recent surge in Hibor tenors led to a brief inversion of the local rate curve last Friday with the one-month gauge rising about its three-month counterpart. At the same time, the spread between overnight Hibor and the one-month level expanded to the widest since December.
“The inverted curve means Hibor’s uptrend will ease,” DBS Bank’s Tse said. “Such a curve indicates liquidity is tighter in the short term and the market expects funding needs should fade soon.”
Chart: Bloomberg
