One-month HIBOR plummeted from its pre-HKMA intervention level of 4.00% to 1.35% as of yesterday. We expect this anomaly to fade shortly. The upcoming seasonal demand for HKD stemming from half-year-end reporting and dividend payouts will support short-term HKD rates. A buoyant stock market will also bolster HIBOR. Favorable China-U.S. trade talks, the PBOC's monetary easing, and China's investment in AI are key catalysts. In particular, resurgent M2 growth in China will likely continue to fuel inflows into the Hang Seng Index.
Even if the demand for HKD proves temporary, HKD rates should stabilize or even rebound under the Linked Exchange Rate System. The one-month HIBOR-SOFR spread has widened to an unprecedented level of approximately 300 basis points. This is opening room for carry trade and pulling the USD/HKD spot back from the strong side of the trading band toward 7.81. The 12-month forward outright rate has also risen from 7.68 to 7.71. The USD is also strengthening on the back of trade deals. These reduce the immediate need for the HKMA to sell HKD. Both the USD/HKD and HIBORs are thus likely to stabilize at current levels. Even if HIBOR continues to decline, the HKD will weaken further toward the weak side of the band, triggering HKMA intervention to buy HKD. The upshot is that HKD rates should rebound in the near term in both cases.
Strategy-wise, we see pay opportunities in HKD rates in the near term. HKD IRS have bottomed out across tenors. Forward IRS rates also exceed current spot rates, suggesting market expectations of rising HKD rates.
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