1M HIBOR rebounded modestly to 2.41% yesterday after briefly dipping to 1.95% earlier in the week, primarily driven by seasonal funding demand around quarter-end settlement and dividend payments. Liquidity conditions tightened, as reflected in firmer forward points. The negative spread against the USD rates narrowed and kept USD/HKD away from the weak side of the convertibility band. Flattening is at play into the month-end.
Looking ahead, HKD rates are likely to remain choppy into 2Q. As seasonal factors fade, HIBOR should retrace lower amid still-ample liquidity. Weakness in equity markets are expected to weigh on funding demand, exerting downward pressure on the front end. Note that the Southbound flow via Stock Connect has fallen by 47% on average in March comparing to February, and Hang Seng Index has retreated from the recent peak of 27,968 in late January to 24,856 yesterday.
A renewed widening in HKD-USD rate differentials could translate into pressure on USD/HKD towards the weak-side of the band. The Hong Kong Monetary Authority will step in to buy HKD and drain liquidity, resulting in a mechanical tightening in interbank rates. In addition, evolving expectations around Federal Reserve policy could further reinforce pressure on HKD. 1m HIBOR is set to bounce eventually. 
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