HKD: Spot USD/HKD To Multi Month Lows, Higher Hibor Rates Aiding
Spot USD/HKD is tracking under 7.7800 in latest dealings, fresh lows back to the first half of May. This looks to be related to further carry trade unwinds. The HKD T/N points are back to -1.00, levels last seen in early May.
- Today's Hibor fix also saw further upside in rates. The 1 week is now above 3.16%. Two weeks ago this rate was at 0.35%. The 1 month rate is up to 3.23%, +42bps for today's fixing outcome.
- The chart below plots the USD/HKD spot rate versus the US-HK 1mth yield differential. By and large the two series are moving fairly closely together, with the differential now back to +112bps.
- Outside local liquidity shifts which have biased rates higher in recent weeks, these trends have been aided by recent softness in US yields as well.
- For USD/HKD spot, focus will be on whether we can re-visit the bottom end of the peg band (7.7500). This episode in early May proved to be fleeting, as the authorities intervened. Note as well the USD/HKD 12mth outright remains comfortably below the bottom end of the peg band (last around 7.7190), which could draw fresh buying interest if spot retreats further.
Fig 1: USD/HKD Versus US-HK 1 mth Yield Differential
Source: Bloomberg Finance L.P./MNI
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CHINA: Bond Futures All Stronger in Morning Session
- With last week being the softest for bonds in two months, the morning session today has seen bond futures bounce back.
- Up +0.19 at 108.38, the 10 year bond future remains below all major moving averages; the nearest being the 20-day EMA of 108.70.
- The 2-year bond future is up +0.03 at 102.35 and sits just below the 20-day EMA of 102.41 which it traded through earlier in the month.
TARIFFS: Europe Large Source Of US Imports But Its Economy Is Less Exposed
A trade deal has been reached between the US and the European Union ahead of this week’s August 1 deadline. The EU was threatened with 30% tariffs but 15% was settled on, in line with Japan, but significantly higher than the current non-agricultural weighted average around 1%. Euro stoxx futures are up 1.0% in APAC trading outperforming the S&P’s +0.4%. EURUSD’s response has been muted.
- The EU is the second largest source of US imports thus a deal was likely but given the significant rise in import duties is also likely to drive higher US prices. The 2024 US deficit with the EU was $235.9bn, but still less than China’s $295.5bn.
- Exports to the US are important with 16.8% of 2024 extra-euro area goods shipments going there but that was worth only 3.2% of GDP, below the exposure of Canada, Mexico and Taiwan but similar to Japan’s.
Exports to the US (ex NAFTA) 2024 %
- The EU is the second largest source of US auto imports and Germany is fifth. Shipments will also face 15% tariffs but below the 25% duty against all US vehicle imports.
- Pharmaceuticals will also face 15% but it was threatened with up to 200%. 30% of US pharma imports come from Ireland and 57% from the EA accounting for over a quarter of total EA exports to the US.
- The 50% tariff on US imports of steel and aluminium is unchanged but both sides agreed not to tax aircraft and parts.
- Like others, Europe has frontloaded shipments to the US with them peaking at 60.8% y/y in March and easing to 7.3% y/y in May. Bloomberg data showed container ship departures from the EU-6 at around 100/day in the first week of July but that eased to 70 last week well below the pre-2025 average of 95.
US imports of pharmaceuticals & medicines % total 2024
JGBS: Futures At Session Highs At Lunch
At the Tokyo lunch break, JGB futures are stronger and hovering near session bests, +34 compared to the settlement levels.
- Today, the local calendar has been empty ahead of 2-year supply tomorrow.
- Cash US tsys are little changed in today's Asia-Pac session.
- Cash JGBs are 3bps richer to 2bps cheaper across benchmarks, with the futures-linked 7-year outperforming. The benchmark 10-year yield is 2.4bps lower at 1.581% versus the cycle high of 1.616%.
- "Two-year JGB auctions typically pass under the radar, but Tuesday's will be spicier than usual as it lands ahead of a Bank of Japan meeting, which is set to deliver guidance on the next policy tightening." (BBG)
- We expect no policy changes at this week’s BOJ policy meeting. The market’s focus will be on the forecast changes in the BOJ’s Outlook Report and the tone of the Governor’s press conference regarding future rate hikes.
- Swap rates are 2bps lower to 1bp higher, with a steeper curve. Swap spreads are mixed.
