How Hong Kong’s Intervention Battle Will Chill Carry Trade
- The spread between local and U.S. rates is expected to narrow
- Lowering of borrowing costs will be timely for city’s economy
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Hong Kong’s defense of its currency peg will likely boost the interbank liquidity pool to a level unseen in two years, lowering local borrowing costs and weakening its dollars.
As authorities sell the city’s currency to protect its peg to the greenback, they inject Hong Kong dollar liquidity into the banking system and boost the city’s aggregate balance. The gauge of interbank cash supply will rise to HK$66.8 billion ($8.6 billion) following this week’s operations. It could climb to as high as HK$150 billion this quarter, according Scotiabank and OCBC Wing Hang Bank Ltd. That compares to HK$426 billion in 2015.