Demand for the local currency was spurred by demand for the Hong Kong interbank funding rates amid market volatility and quarter-end needs, according to the city's monetary authority.
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The overnight cost to borrow in the interbank market soared by 253 basis points to 4.14% on Tuesday, its biggest gain since Bloomberg began compiling the data in 2006. The one-month gauge increased by 51 basis points, the most since the global financial crisis in 2008. Wednesday s rates will be published at 11: 15 a.m. local time.
The cash squeeze came after Credit Suisse Group AG took over the city's stock market and slashed more than 6%, with HSBC Holdings Plc plunging more than 6% amid concerns over additional tier 1 bonds. Uncertainty over the Federal ReserveFederal Reserve's impending rate decision may add to volatility. The Hong Kong dollar is pegged to the dollar of the dollar.
The Hong Kong dollar's interbank rates have risen as the US has continued to raise interest rates since March last year, the Hong Kong Monetary Authority said late Tuesday that rates were also driven by market demand for Hong Kong dollar funding. The statement said that relevant factors include stock market activities, quarter-end seasonal funding demand and external market volatility.
The one month Hong Kong interbank offered rate, known as Hibor, has lagged behind the gain in its US counterpart. The carry trade of the Hong Kong dollar against the dollar was profitable because of the difference in yield.
The intervention by the HKMA to stop the currency from depreciating past the weak end of its band has mopped up cash in the banking system. Since it peaked in 2021, the aggregate balance has shrunk by more than 80% to HK $77 billion, the lowest level in almost three years.
The speculation that the Fed will slow the pace of interest-rate increases may have caused traders to unwind carry trade, boosting demand for Hong Kong dollars, according to a trader. The local currency touched its highest level against the dollar in a month on Tuesday.
Market players, including some Chinese institutions, were less willing to offer Hong Kong dollar funding, which resulted in a higher funding rate, according to the trader.
The Hong Kong dollar market is continuing to operate in a smooth and orderly manner, according to the HKMA.
The Hibor rates are published daily and are based on calculations of quotes of 12 to 20 banks selected by the Hong Kong Monetary Authority. Sixteen of the contributing banks to Hibor had submissions of more than 4% on Tuesday, while the highest bid on Monday was 1.7%. The submissions of HSBC Holdings Plc and Industrial Commercial Bank of China Ltd. were 2.8 percentage points higher than the previous day, the biggest increase among banks, according to data compiled by Bloomberg.
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