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ECB normalization will only bring more volatility

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What’s new ?

ECB and national governments are heading to a new equilibrium where rates are going up and fiscal spending are still at high level. In 2021 E.U spent 5.1% of GDP and will spend another 3.7% in 2022. As the large fiscal spending was not a problem in an era of extreme low interest rates, the situation is changing with higher borrowing cost. The Bank of France estimates that after 10 years, a 1% increase in rates would represent an additional cost of close to 40 billions EUR. So ultimately, it depends on investors appetite to keep buying government debt as ECB withdraw as main buyer. As the chief economist of AXA Investment manager said :”The test is what the market is going to accept in terms of fiscal stimulus that’s no longer going to be backed by extraordinary monetary policy.” The inflation level should ease as the central bank starts raising rates, but if not, the market will get very nervous, and government refinancing costs will rise dramatically.

Hong Kong's aggregate balance start shrinking pace.

HKMA started last week to use its US$ 492 billion of foreign reserves to defend the lower HKD band at 7.85. Every market participant can receive unlimited amount of USD versus HKD @7.85.

Aggregate balance on :

12 May 2022: HK$ 337B
13 May 2022: HK$ 336B
16 May 2022: HK$ 329B
17 May 2022: HK$ 325B
18 May 2022: HK$ 320B

So HKMA is burning roughly US$ 640 billion a day of its reserve to defend the peg. As the liquidity within the Hong Kong banking system will be less ample, the rates will start to rise. Today’s 1M Hibor is 0.2% but needs sooner or later to match the US Libor rate, currently at 0.8% (1M). Some analysts predict Hibor 1M to be more than 2%. The reduction of Hong Kong's liquidity depend on the Monetary policy, and the next two meetings are planned with a 0.5% rate hike each. As consequence the 2% Hibor 1M at the end of the year is possible.If you need to buy a house in Hong Kong, maybe wait a bit, sellers will be force to reduce the price as banks will reassess the amount lendable to household based on new market data.

What’s in the pipe?

  • China loan prime rates Friday

FX rates

USD/JPY @ 127.85 - bullish trend

EUR/USD @ 1.0489 - Bearish trend

GBP/USD @ 1.2378 - Bearish trend

AUD/USD @ 0.6987 - Bearish trend

USD/CNH @ 6.7834- Bullish trend

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