BofA: Keep Calm And ‘Carry’ On

Bank of America note that "the overnight HIBOR fixing pushed to a record high of 5.75% on 30 June and reflects the tight liquidity conditions resulting from a reduced aggregate balance, 2Q dividend activities and seasonal tightness around quarter-end."

• "With quarter-end and 2Q dividend activities having passed, we expect front-end HIBOR fixings to decline throughout July, even as the Fed hikes by the expected 25bps in the July FOMC."
• "Experience from the recent past has shown that local Hong Kong factors can result in a significant decline in HIBOR fixings even in an environment of Fed hikes."
• "The biggest risk to an easing of HKD funding conditions would be a signal from the Chinese government relating to a strong fiscal stimulus, thereby prompting a rally in Chinese equities."
• "However, at the current junction, the BofA Global Research China economics team considers any announcement of a fiscal stimulus to be more of a 'fine-tuning' as opposed to a bazooka."
• "We expect carry to return to the HKD curve as the overnight fixing declines from above 5% back closer towards 3.50%."