Hibor drops as selling pressure abates
Interbank rates dropped by an average of one percentage point yesterday as selling pressure on Hong Kong dollar forwards eased amid growing market perceptions that the Brazil crisis was containable.
Traders said the movements demonstrated hedge funds were not at this point staging a large-scale attack on the local currency.
Rather they were trying to reap profits from tight range-trading in the forwards market, taking advantage of fragile market sentiment. The benchmark three-month rate slid one percentage point to 6.25 per cent while the one-month rate fell 1.125 percentage points to 5.75 per cent.
Forward premiums came down more rapidly than money market rates. The one-year premium fell from Wednesday's high of 2,300 points to 1,700 points. The six-month premium slid from 930 points to 700 points while the three-month premium fell from 480 points to 280 points.
The Hong Kong dollar spot exchange rate, however, remained stable at $7.7470 against the US dollar.
Commonwealth Bank of Australia treasurer Andrew Fung Hau-chung said the narrowing of forward premiums had started in late New York trading on Wednesday after the market began to believe that the effect of the crisis in Brazil would be containable.
He said: 'Although the hedge funds are not attacking our currency board this time, the short-lived but extreme volatilities they have created demonstrate how fragile market sentiment is.' The ongoing fragility of sentiment implies it is unlikely interbank rates will drop further to their previous low levels.
Another trader said: 'Assume we are all convinced that the crisis in Brazil is containable.
'Is it containable for one day only? How about tomorrow?' However, the market consensus at the moment was that the crisis was being settled.
One thing is certain: high interbank rates will push up the funding costs of banks which rely on the interbank market as their main source of funds to finance their assets.
This worry sent Dao Heng Bank shares down $1.95 to close at $21.65, while shares in FPB Bank Holdings reached a low of $1.62 before recovering to finish three cents higher on the day at $1.74.
Wing Lung Bank fell 85 cents to close at $25.10.
A Warburg Dillon Reed banking analyst said the situation in Brazil had caused investors to worry that a new round of currency devaluations could be sparked.
'The whole thing has come full circle,' he said.
