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It has been a multi-month trend where HKD rates outperformed USD rates amid flush HKD liquidity. Partly because of the change in interest rate differential, spot USDHKD was pushed higher.
There is no sign of capital outflows and until the Convertibility Undertaking is triggered we do not expect spikes in HKD rates.
That said, the outperformance of HKD rates has gone a bit too far, and we would prefer to pay HKD rates versus receiving USD rates tactically at current levels.
In China, the 5Y bond swap spread (yields minus IRS) is likely to turn more negative again, as the 5Y IRS remains the instrument to suffer the most amid concerns over de-leveraging and financial risk crackdown, when longer tenor swaps are less liquid while investors may stick to (at least part of) their bond positions.
Moreover, on the campaign trail, Donald Trump was fond of using colorful language to describe how China disadvantages American companies in trade affairs. China, according to him, was “killing us” by manipulating its currency and cheating U.S. companies on every front.
But of late, Trump has sent mixed signals on China’s unfair practices, simultaneously backing off his accusation that China devalues its currency to get an advantage exporting its manufactured goods while just this week announcing a crackdown on Chinese steel dumping.
