(Bloomberg) -- Hong Kong’s overnight cost of borrowing fell on Wednesday, easing a cash crunch.

The overnight interbank rate, known as Hibor, tumbled 175 basis points to 2.4%, after surging by the most in at least 17 years on Tuesday. The one-month cost dropped 13 basis points to 3.37%.

Hong Kong’s equities market has stabilized after tumbling on Monday following Credit Suisse Group AG’s takeover. The Hang Seng Index has climbed 3.3% in two days through Wednesday. The city’s monetary authority attributed the recent surge in interbank funding rates to demand for the local currency amid market volatility and quarter-end needs.

“We’ve seen market sentiment improve around the banking turmoil in the West,” said Eddie Cheung, senior emerging markets strategist at Credit Agricole in Hong Kong. “Local equity markets are also outperforming today, so helping financial conditions.”

Overnight Hibor soared 253 basis points to 4.14% on Tuesday in its biggest gain since Bloomberg started compiling the data in 2006. The one-month gauge increased by 51 basis points, the most since the global financial crisis in 2008.

Uncertainty over the Federal Reserve’s impending rate decision may be adding to volatility in rates. The Hong Kong dollar is pegged to the greenback. 

“The Hong Kong liquidity tightening looks short-lived,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank Ltd in Hong Kong. “Investors are awaiting the FOMC meeting. The quarter-end factor and risk-off mood may make market participants to hoard HKD funding and push HKD rates higher, while any Fed dovish shift could weigh on the back-end forward curve.”

The one-month Hong Kong interbank offered rate, known as Hibor, has lagged behind the gain in its US counterpart. The difference in yield made shorting the Hong Kong dollar against the greenback profitable, known as the carry trade. 

Intervention by the HKMA to stop the currency from depreciating past the weak end of its band has mopped up cash in the banking system. The aggregate balance — the gauge of interbank liquidity, has shrunk by more than 80% since its peak in 2021 to HK$77 billion, the lowest level in almost three years. That means the wild swings may continue.

“The smaller the aggregate balance, the more sensitive Hibor will be to liquidity conditions and hence more volatility,” Credit Agricole’s Cheung said.

Rates had been driven higher by “market demand for Hong Kong dollar funding,” the HKMA said in an emailed statement late Tuesday. “Recently, relevant factors include stock market activities, quarter-end seasonal funding demand and external market volatility.”

Speculation that the Fed will slow the pace of interest-rate increases may also be prompting traders to unwind the carry trade, boosting demand for Hong Kong dollars, according to a trader. The local currency touched its highest level against the greenback in a month on Tuesday.

The drama comes as Hong Kong hosts its busiest week for global events since the pandemic began. Among events taking place are the Credit Suisse Asian Investment Conference, the HKMA-BIS Joint Conference of central bankers, a family office event titled Wealth for Good in Hong Kong Summit, as well as international art fair Art Basel. 

Hong Kong to Be Tested by Busiest Month for Events in Years

The Hibor rates are published daily and are based on calculations of quotes of 12 to 20 banks selected by the Hong Kong Monetary Authority. 

Sixteen of the contributing banks to Hibor had submissions of more than 4% on Tuesday, whereas the highest bid on Monday was 1.7%. HSBC Holdings Plc and Industrial & Commercial Bank of China Ltd.’s submissions were 2.8 percentage points higher than the previous day, the biggest increase among banks, according to data compiled by Bloomberg.

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