(Bloomberg) -- As the Hong Kong dollar nears the weak end of its trading band, strategists see currency defenses raising the risk of volatility in borrowing costs, with interbank cash reserves sitting near historical lows.
The Hong Kong dollar has moved within striking distance of the weak end of its 7.75–7.85 per US dollar trading range as higher Treasury yields prompt traders to favor the greenback over the local currency. To prevent the currency from breaching its weak-side limit, the Hong Kong Monetary Authority buys local dollars, an operation that drains an interbank cash buffer known as the aggregate balance.
That liquidity withdrawal drives up interbank borrowing costs and makes it less attractive for traders to short the Hong Kong dollar. But the aggregate balance has already fallen to HK$54 billion ($6.9 billion), a threshold crossed only once in 2023 during active stretches of currency defense, according to a Bloomberg analysis of HKMA data.
Strategists see a thin cash buffer raising the risk of even modest HKMA interventions causing sharp spikes in local borrowing costs.
“For Hong Kong Interbank Offered Rates, the overall trend is set to be upward,” said Carie Li, a strategist at DBS Bank in Hong Kong. “It could be volatile if aggregate balance falls to the previous lows.”