The spectre of another speculative attack on the peg has prompted the Hong Kong Monetary Authority to make more information available on liquidity in the interbank market. The authority has decided to issue statements twice a day detailing aggregate balances in accounts it holds on behalf of banks for foreign exchange dealings for the coming two days. The aggregate balance shows the flow of funds into or out of the Hong Kong dollar and is the best indicator of Hong Kong dollar liquidity. The authority said increased transparency would help smooth out volatility in interbank rates, by giving dealers two day's worth of information about liquidity in the system. Authority chief executive Joseph Yam Chi-kwong said the change would discourage speculators. 'The more transparency in the interbank market, the more difficult for currency speculators to attack the dollar,' he said. 'The new measure will give banks better knowledge of liquidity in the interbank market and interbank rates will adjust more effectively.' Interbank rates moved sharply higher yesterday after the authority made a surprise announcement that the aggregate balance of bank clearing accounts held for foreign exchange deals could turn negative today, traders said. The announcement - now daily policy - moved rates up, as the market was caught unawares by the possibility of a negative balance, dealers said. The interest rate for one-month interbank lending - which determines most banks' cost of funds - hit 15.5 per cent during morning trading before closing at 13 per cent from 10.7 per cent the previous day. The benchmark three-month interbank rate - the rate which sets most corporate borrowings - rose to 14 per cent in the morning before ending the day at 12 per cent from Wednesday's 10.7 per cent. The 'tom-next rate' - tomorrow's overnight lending priced and drawn down today but repaid tomorrow - closed at 10 per cent compared with Wednesday's 8.5 per cent, while the overnight rate fell to 4.5 per cent from 6 per cent. Yesterday's announcement by the authority forecast today's aggregate balance would be minus $4.1 billion, indicating a large decline in Hong Kong dollar liquidity. The second announcement said this had declined to minus $2.9 billion while on Monday the forecast is minus $426 million. Mr Yam attributed the move to a negative balance to banks selling Hong Kong dollars to the authority on Wednesday. Traders said that, theoretically, a negative aggregate balance in bank foreign exchange clearing accounts meant there was a danger some banks could default on their settlements. However, Commonwealth Bank of Australia treasurer Andrew Fung Hau-chung said there was little real risk that anyone would default on settling with the authority. If the situation were to become so adverse, the authority would be buying back US dollars in the market to create the needed liquidity, he said. 'Banks can always add short-term liquidity by borrowing with other counterparties in the repo market or, as a last resort, by discounting their Exchange Fund bills and notes through the authority's liquidity adjustment facility,' Mr Fung said.
