FAST FIVE: Hong Kong Interbank Rates Soars To 2008 Highs To Preserve Bank Stability, Crush FX Shorts

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“It is a good sign that shows a limited risk of massive fund outflow, as the demand for the local currency remains strong despite tight interbank liquidity toward the quarter-end,” he said, forgetting to add that the limited risk of massive fund outflows was only because of the surge in interbank rates, which of course is unsustainable – just ask Turkey which in late March sent its overnight rate to over 1000% for a few days.

The resulting squeeze drove up the cost of shorting the Hong Kong dollar, which also contributed to the one-day jump.

US House Speaker Nancy Pelosi threatened legislative action in Congress to “reassess” whether Hong Kong is sufficiently autonomous.

Of course, manipulating funding costs is a two-edged sword and while it delays or reverses sharp capital outflows, and a selloff in the currency, it also slams all local assets.

“Uncertainty on local policies will confuse investors and affect the flows in and out of Hong Kong stocks,” said Ronald Wan, chief executive of Partners Capital International Ltd.

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