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Overnight, US rates continued to rise - 2Y UST yields by around 13bps and 10Y by 7bps. Fed pricing is now for one more 25bps hike at either the June or July meeting (our base case is for Fed rates to have already peaked in May) and 25-50bps of subsequent rate cuts before year-end. We expect the beta impact of re-rising US rates on Asia rates markets would be limited. Here in Asia, expectations around monetary policy stances and forward rate paths are comparatively more anchored. Most central banks have entered into pauses and the likelihood of them restarting rate hikes, for inflation or financial stability reasons, are seen as low.
HKD Rates - O/N Hibor fixing has pulled back to 3.04% on 24th and 3.49% on 25th, since hitting a high of 4.96% on 19th May (Honia pulled back to 3.25% on 25th from high of 4.79% on 19th May). This suggest that the recent increases in short-term bank settlement needs have eased. Indeed, HKMA's Discount Window hasn't been tapped since 8th May (where HKD844mn was borrowed and subsequently reversed on 9th May). Because of the low level of Aggregate Balance, HKD funding costs are naturally going to be more sensitive/volatile to HKD supply-demand fluctuations. Even though Hibor has eased for now, we should expect see more episodes of occasional surges/spikes in O/N Hibor, whenever there are larger-than-expected increases in demand for HKD liquidity.
Pullback in front-end Hibor have also driven T/N forward points back down to -7 to -12pips, which should see some interest to re-engage in buy USD vs sell HKD carry trades. That said, at this stage of the cycle when Fed rates are peaking and Aggregate Balance is low, carry opportunities are less attractive after adjusting for Hibor volatility and thus, carry traders are likely to be more cautious. Unless the Fed pivots dovish or starts to cut rates, USDHKD could still test the weak-side CU and push Aggregate Balance lower and towards zero.
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