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Over the past month, interest rates in Hong Kong have remained at just above zero per cent. This unusual situation sheds light on various factors impacting the financial markets, from Asian investors’ decreasing interest in US assets to the revival of Hong Kong’s capital markets, and the constrained risk-taking capacity of banks and hedge funds.
While Donald Trump’s trade policy fluctuations have not yet disrupted global financial markets, the situation in Hong Kong indicates that they are under pressure.
The peculiarity of zero interest rates in Hong Kong lies in its currency peg to the US dollar, creating an apparent arbitrage opportunity. However, this divergence has persisted for more than a month, with the overnight rate consistently at 0.01 per cent.
The unexpected spike in the New Taiwan dollar triggered a chain of events that led to hedge funds buying Asian currencies, including the Hong Kong dollar, driving it to the strong end of its trading band. This influx of liquidity pushed local interest rates down to zero.
Technical factors like dividend season and mainland companies moving funds for payments are also contributing to the situation. However, the persistence of the arbitrage suggests limitations in the market’s ability to capitalize on it.
Market nervousness about US financial markets is evident in the growing desire to hold Hong Kong dollars and other Asian currencies. The reluctance to invest new money in US assets reflects a shift in sentiment after years of strong appetite for these investments.
Although the current low interest rates in Hong Kong may not last long, they highlight the fragility of the financial markets. As the situation unfolds, it serves as a warning sign of potential trouble ahead.
robin.harding@ft.com