IPO boom buoys short-lived HKD rally

Once the fund raising dies down, the HKD will plunge again and prompt HKMA intervention.

The Hong Kong Monetary Authority may be required to step in again by mid-May to mid-June and purchase $29b in local currency to support the struggling dollar’s peg with the greenback, according to Bank of America Merrill Lynch.

The recent rally in HKD which buoyed the US/HKD beyond 7.85 level is only short-lived as it reflects fund raising activities for blockbuster IPOs in the city, BofAML pointed out. This includes Chinese smartphone maker Xiaomi’s public debut as well as insurer Ping An Good Doctor who are both taking advantage of Hong Kong’s newly liberalised listing regime.

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As the hype fades, the fundamental story of interest rate differentials between Hong Kong and the global economy will accelerate HKD depreciation, prompting HKMA intervention once again.

“The withdrawal of HKD liquidity is expected to cause 3M HIBOR to rise on a sustained basis, ultimately causing the Prime rate in Hong Kong to be raised for the first time since the global financial crisis. We expect the first increase in the Prime rate to occur between 4Q 2018 and 1Q 2019,” BofAML added.

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The US/HKD will not necessarily stabilise below 7.85 when aggregate balance is at $100b but that the magnitude of operations required to keep it below the weak end of the trading band is likely to be less as HIBOR becomes sensitive to changes in aggregate balance.