Goldman Sachs Expects Wide US-HK Rate Differentials To Keep USD/HKD Spot Elevated

The US Bank weighs in on the USD/HKD outlook, with current widely in rate differentials to keep USD/HKD supported. Hitting the top end of the peg band will drive intervention and drive higher Hibor rates, with a lower aggregate balance likely to make Hibor more sensitive to interbank liquidity shifts.

• "Wide USD LIBOR vs HKD HIBOR spreads should drive spot USD/HKD higher. Over the past month, spot USD/HKD rose from 7.800 to above 7.845. The USD LIBOR less HKD HIBOR spread climbed to +120bp from +30bp, on a sharp decline of HIBOR, contributing to the recent depreciation. The large fall of HIBOR in August is likely due to eased funding pressures from quarter-end seasonality and financial market activities, such as the HKD50bn silver bond issuance in late July, a retail government bond to provide investment products for elderly residents.[1] The support from dividend payments in summer, i.e., non-HK companies sell USD and buy HKD to pay dividends, has likely peaked. The significant wide interest rate differential would likely encourage yield seeking deposit outflows and spur upward pressure on USD/HKD towards the upper end of the band, prompting HKMA to intervene, and draining the aggregate balance, which should push HKD rates higher to catch up with USD rates. Given the relatively low levels of aggregate balance (below HKD 50bn) and high loan-to-deposit ratio, we think HIBOR should be more sensitive to changes in interbank liquidity, which should drive USD LIBOR less HKD HIBOR spreads narrower. "