- However, both the timing and magnitude of any intervention remain uncertain.
- USD/HKD could hover near the 7.85 level for some time without prompting intervention.
- Implication to investors: We expect 1M HIBOR to reach 3.15% by end-2026 and 3.40% by the end of 1Q27
- Strategy: Modest intervention could trigger curve flattening.
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HKMA’s signal on USDHKD
In a note yesterday, HKMA Chief Executive Eddie Yue stated that USD/HKD could test the weak end of the trading band. At that point, the HKMA would extract liquidity by purchasing HKD. In our view, this risk is increasing. Note that 1M HIBOR settled at 2.90% as of yesterday after peaking at 3.02% last week.
Several factors are exerting downward pressure on front-end HKD rates, including the fading of seasonal HKD demand from quarter-end and dividend payments, alongside moderating demand for HKD assets. The equity market appears to be losing momentum, with the HSI retreating toward the 24,000 level.
Both the timing and magnitude of any intervention remain uncertain. We weigh several considerations:
- Low Aggregate Balance: At HKD 54bn, the Aggregate Balance is relatively low by historical standards. This could help buffer against further HIBOR declines and the widening of negative 1m HIBOR-SOFR spreads towards -120bps, the level that triggers HKMA intervention.
- Southbound Connect Flows: Net purchases of Hong Kong stocks via Southbound Stock Connect could resume following the conclusion of China's National Day Golden Week holiday today. In fact, the 20-day moving average of net buy volume had already improved from HKD961bn on 15 September to HKD2,309bn prior to the holiday.
- Upcoming Seasonal Demand: Seasonal liquidity demand from month-end and year-end factors will likely resurface as we approach late October.
- Fed Policy & DXY Outlook: The Federal Reserve is expected to hike its target rate another two times over the next six months, compared to market pricing of three to four hikes. Recent softening in the US labor market and other incoming data prints could keep the DXY rangebound, thereby mitigating depreciation pressure on the HKD.
USD/HKD could hover near the 7.85 level for some time without prompting immediate HKMA intervention. The upshot is that upward pressure on HIBOR should remain manageable alongside a relatively limited intervention size.
We expect 1M HIBOR to reach 3.15% by the end of this year and 3.40% by the end of 1Q27.
STRATEGY IMPLICATIONS
A modest intervention could trigger yield curve flattening following the tactical steepening seen over the past two weeks. The 2s10s HKD IRS curve has steepened from 1 bp on 22 September to 25 bps as of yesterday. While the HKD curve could follow the current USD curve steepening under the linked exchange rate system, HKMA interventions tend to exert additional flattening pressure on the HKD curve via liquidity squeezes.
Historical data since 2015 indicates that the probability of 2s10s flattening within five days of an HKMA intervention is 55.3%, compared to a coin-flip (51.1%) chance for the USD curve. The median magnitude of HKD curve flattening during these windows was 2 bps, versus virtual no change for the USD curve. This extra flattening bias was apparent across all three out of five HKMA interventions within the sample period. Even during the Feb–May 2023 interventions—when both USD and HKD curves steepened—the increase in the 2s10s HKD spread was 48% less than that of its USD counterpart at 30bps.
Taking stock of our trade idea:
Steepen 2Y/10Y HKD IRS (Entry (25 Sept): 5bps, TP: 27bps, SL: -15bps): We have taken taking profit early at market open to mitigate potential flattening risks stemming from prospective HKMA interventions.
Investors should look for tactical re-entry opportunities to position for steepening amid an ongoing rate-hike cycle, higher global term premia, and domestic fiscal spending geared toward the Five-Year Plan.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
nathanchow@dbs.com
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