Last week, we documented what Nomura’s Charlie McElligott described as “yet another ‘Vol Event’ in the FX carry-space”, when the Hong Kong dollar suddenly surged the most in a decade and a half.
As noted at the time, manic efforts to figure out what happened were probably unnecessary. That is, it wasn’t much of a “mystery”, per se. This thing got moving in the “wrong” direction (probably because folks getting spooked ahead of the Fed hike given that Hong Kong imports U.S. monetary policy and also thanks to a new plan for the PBoC to issue CNH bills), people started to cover, accelerating the move, and that forced out more people, etc. The carry unwind was readily apparent in, for instance, Treasury futures.
Fast forward to Thursday and, following the Fed, HSBC, Standard Chartered and Hang Seng Bank all hiked their prime rates. These are the first hikes in a dozen years.
First, here’s one-month HKD HIBOR which jumped 6bps to the highest since October 2008:
And here’s HSBC’s prime rate plotted with one-month HIBOR (if you squint, you can see the hike over there on the right-hand side):
Why is this a problem? Well, because one of the concerns in terms of Hong Kong importing U.S monetary policy is that rate hikes will end up bursting the city’s property bubble.
According to a measure of secondary private residential property prices, Hong Kong home prices have exploded over the past two decades and are up something truly egregious since the lows in 2003:
In case it isn’t clear enough, that’s probably not a great setup in an environment where local rates will be literally forced higher by the dollar peg.