HONG KONG — Due to the significant difference between local and US interest rates, Hong Kong’s interbank liquidity is decreasing, approaching levels not seen since the global financial crisis.
As a result, the Asian financial center must frequently intervene in the market to protect the value of its currency.
The city’s aggregate balance is expected to reach HK$49.2 billion ($6.3 billion) on Thursday, following the Hong Kong Monetary Authority’s recent purchase of HK$6.9 billion to maintain the local dollar’s peg to the US dollar.
The key measure of interbank liquidity has already dropped approximately 90% from its peak in 2021.
This month, selling of the Hong Kong dollar has continued due to the significant gap between local short-term interest rates and those in the US, where the Federal Reserve has been implementing aggressive policy tightening measures for more than a year.
As a result, the Hong Kong Monetary Authority has faced the challenge of intervening periodically to prevent the local currency from deviating outside its trading range of 7.75-7.85 per dollar.
“As the balance drops toward 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.”