HK rates and THB watch
In the last couple of months, HK interest rates have risen sharply against US rates. The 1M Hibor-Libor spread is now at its widest since the Asian Financial Crisis. The entire HK rates curve has moved above the US curve (most of its history has been spent below) and the front-end has been in an inverted state since July 2019. While the HK curve is likely pricing in a high level of risk premium around the ongoing unrest, equity-related factors could be at play too. Late last year, there was a surge in Equity IPO volumes (USD23bn in 4Q2019 vs USD6bn average in 4Q2016-2018) which likely drove greater demand for HKD funds. We think that as year-end tightness and the impact of Alibaba’s mega USD13bn listing start to fade, liquidity conditions should normalize and help HK rates moderate ahead.
While interest rates are reflecting a fair amount of HK risk, the currency seems far more sanguine, having rallied from the weak-end (7.85) to the stronger-half (<7.80) of the trading band. From an interest rates perspective, the flipping of HK-US rate differentials, from negative to positive, would have put a halt to long USD-short HKD arbitrage carry trades (key source of depreciation pressures on HKD). Furthermore, level of bank deposits (both HKD and USD) and the Aggregate Balance remain stable, suggesting that outflow pressures may not be as severe as some had expected.
FX: THB strength to stall
Thailand has stepped up efforts to curtail the Thai baht’s strength around 30 to the USD. The Bank of Thailand is allowing exporters to keep USD1mn of their proceeds abroad, a fivefold increase from the current USD200k limit. It will allow local companies and residents to keep foreign currency in the country and ease regulations for insurance companies to invest overseas. The BOT does not encourage the THB as a safe haven from the Middle East tensions.
THB strength has been out of line with weaker domestic fundamentals and regional currency weakness during the trade war.Level-wise, USDTHB is back around its post-Asian crisis floor around 30. Against lows in 2011, the USD is significantly higher against the IDR (64%), MYR (40%) and SGD (12%). More importantly, the business sentiment index has plunged sufficiently for policymakers to consider the THB’s strength as misplaced. Historically, this has led the THB to stop appreciating and return some gains.
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