(Bloomberg) — A seasonal cash demand spike in Hong Kong is set to lift funding costs, making it less attractive to pursue a carry trade using the local dollar, analysts said.
Listed firms’ mid‑year dividend payouts and banks’ need to meet regulatory metrics have lifted funding demand. That surge has pushed the one‑month Hong Kong Interbank Offered Rate, or Hibor, to its highest level since January this week.
A rising Hibor narrows the interest rate gap between the US dollar and Hong Kong dollar. Investors who previously borrowed cheap local dollars to buy higher-yielding greenback assets may unwind some of those trades, said Carie Li, a strategist at DBS Bank in Hong Kong.
Unwinding these carry trades may ease short-term currency pressure. Higher interbank rates will also drive up household borrowing costs, including mortgage payments in a market heavily linked to Hibor.
“Hong Kong dollar demand will increase due to seasonality, including half-year end and dividend payouts,” Li said. “If Hibor goes up, it may trigger an unwinding” of some carry trades and drive the US dollar down.
The one-month Hibor will likely rise to a 3%-4% range in the coming months, Li estimated. The rate stood at about 2.68% Wednesday.
The Hong Kong Monetary Authority, the de-facto central bank in the city, issued its largest overnight loans to banks in almost four months on Tuesday. That came after HK$920 million ($117 million) of discount-window lending.
“When demand for HKD spikes, then borrowing from HKMA happens, meaning there is no ‘squeeze’ or issue in the system,” said Wee Khoon Chong, Asia Pacific market strategist at BNY. “So the HKMA lending is likely due to a technical factor.”
Carry trades have pushed the Hong Kong dollar toward the weak end of its 7.75–7.85 band versus the US dollar. It’s nearing the weakest level since August as local stocks stay on track for their first annual drop in three years, intensifying capital‑outflow pressure.
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