Core Viewpoint - The Hong Kong dollar (HKD) has been depreciating against the US dollar (USD), approaching the weak end of the currency peg at 7.85 HKD per USD, following a period of strong performance that triggered the "strong-side convertibility guarantee" at 7.75 HKD per USD in early May [2][3][5]. Currency Exchange Dynamics - Since April, the USD has depreciated against Asian currencies, leading to an appreciation of the HKD, prompting the Hong Kong Monetary Authority (HKMA) to intervene by injecting significant liquidity into the market, totaling 129.4 billion HKD from May 2 to May 5 [3][4]. - The HKMA's actions resulted in a substantial increase in HKD liquidity, causing the Hong Kong Interbank Offered Rate (HIBOR) to decline, which widened the interest rate differential between HKD and USD [3][6]. Interest Rate Trends - The release of liquidity by the HKMA has led to a significant drop in HKD deposit rates, with major banks offering rates as low as 1% for HKD time deposits, while USD deposit rates remain above 3% [4][9]. - As of June 19, 2023, the HKD deposit rates at major banks have decreased sharply, with HSBC offering a maximum of 1.1% for new funds, highlighting the disparity between HKD and USD deposit rates [9][10]. Market Reactions - The HKD has seen a decline from 7.75 to 7.82 against the USD by May 20, 2023, as liquidity conditions in the banking system remained abundant, leading to lower borrowing costs and prompting investors to buy USD while selling HKD [7][8]. - The HKMA has not yet intervened to buy HKD despite the currency nearing the weak end of the peg, indicating a potential future action to manage liquidity levels [8]. Economic Implications - The current low interest rate environment in Hong Kong is viewed as beneficial for the overall economic conditions, although the sustainability of these low rates is uncertain due to fluctuating global trade and economic prospects [11].

Core Viewpoint - The report from Bank of America indicates that the 1-month HIBOR has significantly dropped from 4% to 0.58% in one month, raising questions about its potential recovery to 4% given the current SOFR remains at 4% [1][7]. HIBOR and SOFR Dynamics - The report emphasizes that the behavior of HIBOR and the willingness for HKD arbitrage transactions will differ from previous weak-side Currency Board (CU) cycles due to the current bearish USD environment and strong inflows into HKD driven by positive momentum in the Chinese stock market [1][4]. - Bank of America predicts that the 1-month HIBOR will peak at 2.60% in Q4 2025, which is lower than the nearly 3% implied yield for the same period [2][3]. HIBOR Forecasts - The revised forecasts for HIBOR and USD/HKD exchange rates are as follows: - Current: 1-month HIBOR at 0.59%, 3-month HIBOR at 1.32%, USD/HKD at 7.85 - Q3 2025: 1-month HIBOR at 1.00%, 3-month HIBOR at 1.50%, USD/HKD at 7.85 - Q4 2025: 1-month HIBOR at 2.60%, 3-month HIBOR at 2.70%, USD/HKD at 7.85 - Q1 2026: 1-month HIBOR at 2.60%, 3-month HIBOR at 2.80%, USD/HKD at 7.83 - Q2 2026: 1-month HIBOR at 2.60%, 3-month HIBOR at 2.80%, USD/HKD at 7.81 - Q3 2026: 1-month HIBOR at 2.60%, 3-month HIBOR at 2.80%, USD/HKD at 7.78 - Q4 2026: 1-month HIBOR at 2.40%, 3-month HIBOR at 2.60%, USD/HKD at 7.75 [3]. Market Conditions and Arbitrage - The report suggests that the current level of HIBOR is primarily driven by supply factors, particularly the aggregate balance, which has increased significantly from a recent low of 45 billion HKD to 171 billion HKD [16][19]. - The interest in USD arbitrage transactions is expected to remain low due to market expectations of two rate cuts by the Federal Reserve in 2025, which will hinder the demand for long USD/HKD positions [26][30]. Conclusion on HIBOR Trends - Bank of America concludes that the current weak-side CU cycle is likely to be shorter than previous cycles, lasting until Q3 2025, as the HIBOR-SOFR spread narrows and reduces the motivation for further HKD arbitrage transactions [30].