Banks in Hong Kong borrowed the largest amount of short-term cash in over two years from the authorities, suggesting there was sudden demand for liquidity.
The Hong Kong Monetary Authority — the city’s de-facto central bank — loaned out HK$3.77 billion ($482 million) through its discount window on Monday, the most since January 2021, according to data compiled by Bloomberg. Lenders had only tapped the facility six other days this year, with the next largest amount at just HK$844 million.
With the HKMA buying the city’s currency to manage its peg to the dollar, liquidity has tightened and driven Hong Kong interbank offered rates closer to the comparable US borrowing costs. Still, with overnight Hibor more than 120 basis points below the HKMA’s discount window, it indicates an abrupt demand for cash that spurred the usage of the facility.
“Basically it shows the higher rates and recent developments like the banking crisis and US debt limit content have made it harder for banks to raise funds via interbank channels,” said Stephen Chiu, chief Asia FX & rates strategist at Bloomberg Intelligence in Hong Kong. “Their lines filled up and couldn’t be utilized, so had to revert to HKMA.”
The pick-up of borrowing costs is the side effect of the HKMA’s repeated intervention, which reduced the aggregate balance — a gauge of interbank cash supply - to the lowest level since 2008.
The HKMA has defended the currency peg over the past year as the Hong Kong dollar was repeatedly pushed to 7.85 per greenback, the weakest it’s allowed to trade. However, some analysts believe that Monday’s borrowing isn’t part of a systematic trend.
“The absolute amount of cash HKMA offered on Monday was small and it seems related to thin market condition during US holiday,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong. “The demand for the facility and the squeeze could be a one-off event. We don’t see an unusual situation in the overall liquidity front today after the discount window usage,” he added.
READ: Hong Kong Overnight Funding Costs Surge to Highest Since 2007
--With assistance from Masaki Kondo.
