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SCMP Reporter

The local money market saw volatile trading yesterday as dealers were scared by a shortage of interbank liquidity.

 Hong Kong suffered an outflow of about US$107 million on Wednesday after a similar shift of US$245 million on Monday as customers moved deposits from Hong Kong dollars into US dollars.

 The transfer could also be attributed to Japanese banks' move to scale back their operations in Hong Kong.

 The outflow threatened to reduce the aggregate balance of interbank liquidity to just HK$112 million when all deals were settled today, according to figures published by the Hong Kong Monetary Authority.

 Concern about the shortage of liquidity pushed rates to their day highs at 11 am.

 Subsequently, the HKMA reported a continuous inflow of capital, restoring the aggregate balance forecast figure for today back to HK$2.328 billion.

 In other words, the SAR saw a capital inflow amounting to US$285 million or HK$2.216 billion within three trading hours.

 Both the overnight rate and the 'tom-next' rates - tomorrow's price of overnight funds - closed at 6.25 per cent after touching the day's high of 6.75 per cent.

 The one-month rate finished at 6.25 per cent after peaking at 7.125 per cent. The benchmark three-month rate, having topped at 7.625 per cent, ended at 7 per cent.

 Traders were puzzled by the source of the inflow because most of it was to be settled on a 'value-tomorrow' basis - settlement one day after order execution day.

 This contrasts with the usual 'value-spot' deals in which settlement is made two days after execution.

 A dealer said there should be no imminent settlement pressure today as demonstrated by the absence of a substantial increase in the 'tom-next' rate yesterday.

 So there should not be much market demand for 'value-tomorrow' deals.

 An HKMA spokesman would not provide an answer for this, only reiterating the authority's stance that the inflow had demonstrated the effectiveness of its seven measures to purify the SAR's currency board mechanism.



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