Hong Kong Rates May Spike as Funds Depart, Morgan Stanley Says
Street protests in the city, currently in their 11th week, have put pressure on the Hong Kong dollar peg.
(Bloomberg) -- Hong Kong’s interbank interest rates will turn increasingly volatile as investors continue to yank cash from the city’s financial markets, according to Morgan Stanley.
The Hong Kong dollar may test the weak end of its trading band with the greenback if the pace of outflows increases, Morgan Stanley strategists including Chun Him Cheung wrote in a report dated Aug. 19. That would force the city’s de facto central bank to defend the peg, squeezing liquidity and triggering a spike in local borrowing costs, they wrote.
Street protests in the city, currently in their 11th week, have put pressure on the Hong Kong dollar peg and prompted a round of stimulus measures by the government to accelerate economic growth. While the Hong Kong Monetary Authority has “sufficient” reserves to defend the local currency at 7.85, the danger is that volatile Hibor rates will further roil markets and hurt the local economy, according to Morgan Stanley.
“We expect the linked exchange rate system between USD and HKD to hold despite growing investor concerns,” Morgan Stanley’s note said. “However, if fund outflows increase, this could push spot USD/HKD to the 7.85 ceiling, resulting in a more volatile Hibor owing to the lower level of aggregate balance in the Hong Kong monetary system.”
The analysts predict the city’s economy will contract 0.3% this year, down from a forecast of 1% growth.
The aggregate balance, a measure of interbank liquidity, has fallen from a peak of HK$426 billion to around HK$54 billion.
Morgan Stanley said it recommends investors “remain defensively positioned and sell near-term rallies” in stocks. “Hibor-Libor spikes have been associated with greater HK equity valuation declines in absolute terms and relative to MSCI World than those that have occurred thus far,” it said.
The Hang Seng Index could drop to 21,500 points this year, according to Morgan Stanley, implying a retreat of 18% from Monday’s close. That would tip the gauge into a bear market, defined as a loss of 20% or more from peak to trough.
The Hong Kong dollar strengthened 0.02% to 7.8430 versus the greenback as of 5:12 p.m. in the city. The Hang Seng Index closed 0.2% lower.
To contact the reporter on this story: Gregor Stuart Hunter in Hong Kong at ghunter21@bloomberg.net
To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Joanna Ossinger, Philip Glamann
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