Short-end HKD rates have surged over the past two weeks despite the 50bps cut in the Fed Funds Target Rate (FFR) in mid-September. This trend will likely sustain in 4Q, in our view. First, seasonal factors usually play a significant role in HIBOR movements in final quarter as corporates demand short-term liquidity to settle transactions before year-end. Beyond seasonal factors, HKD money demand will remain elevated amid asset market rallies. The Hang Seng Index has soared around 20% since September, thanks to decisive stimulus from the Central Government. Further stimulus down the road will support asset prices and hence HIBORs. Against this backdrop, the spread against the FFR and SOFR will likely narrow.
For longer tenors such as 2Y and 10Y IRS that are less sensitive to near-term boosts, the spread against SOFR counterparts will narrow too. Given relatively tighter liquidity, HKD rates tend to fall slower than USD rates during initial phase of rate cut cycles. The receive opportunities against USD rates will gradually fade.
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