The Hong Kong Monetary Authority issued a statement discussing the recent increase in dollar tightness and yields despite the Fed’s recent rate cuts and liquidity injection.
Since the Federal Reserve lowered policy rates to nearly zero and launched a $700 billion quantitate easing program, the U.S. 10-year yield rebounded to reach around 1.2 percent – the highest level this month.
«One may wonder why [this happened],» said HKMA deputy chief executive Howard Lee in the statement.
According to Lee, risk-off sentiment coupled with the Fed’s decision to further loosen has led to increased demand for the dollar as the «risk-free asset of choice». This is in addition to banks' traditional bias towards holding more dollar for potential client withdrawal requests, margin replenishment for their own investments and contingency purposes.
Business as Usual
Whilst dollar movements have undoubtedly had an impact, Lee notes that local Hong Kong dollar demand, recent IPO activities and quarter-end effects have also driven increased demand and, effectively, funding costs. He nonetheless underlines that «the HKD money market continues to operate smoothly, and interbank borrowing and lending activities remain normal» highlighting a moderate 1-2 percent 1-month interbank rate and some HK$1 trillion in bank reserves.
«The strain in USD liquidity has also been a hot topic in the HKMA’s on-going dialogues with other central banks and financial institutions over the past few days,» Lee added.
«Major central banks including the Fed have already jointly rolled out several easing measures. But I think more time is needed for the effect of the lowered policy rates and other easing measures to be fully transmitted to the markets, and by then the situation should gradually improve.»
