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The FED is about to unleash biggest hawkish move since 2000

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What’s new?

Economic reality will pop up at tomorrow's FED meeting as J.Powell face the biggest challenge since two decades with the 2000’s Dot Com bubble. The committee has to front-load tightening to hold down inflation, the real question is how high does the federal funds rate need to go to the moderate overheating economy without risking recession. It is expected to raise the rate by 0.5% bringing the Fed rate to 0.73% Most important to follow will be the tone used by Powell to guess what will be the future pace of rate hikes and any hint about balance sheet reduction that will also impact rates curve.

Is there any stress about the Hong Kong currency board?

Not really. At least for now, the 1-month HIBOR yield is at 0.15% as of today and the HKMA aggregate balance remains ample even if shrinking. There are no significant HKD outflows and the fiscal reserves are over HK$ 1 trillion with no external debt. On the economic side, an increase of 1% of the HIBOR rate means around 48,000 HKD additional payments on a mortgage loan (considering a 10M HKD loan over a period of 30 years). It could curb the growth but we need more to accentuate the current decline of the property market.

An increase of 2% and more will probably have a deeper impact. The last speculative attack against the currency board was during the Asian financial crisis where 1-month Hibor spiked to 20% and property value lost 60% of their value from its peak, stock market erased half its value. I’m not sure Hong Kong officials are ready to pay that price again.

What’s in the pipe?

  • Fed rate decision, briefing with Chair Jerome Powell, Wednesday
  • EIA crude oil inventory report, Wednesday
  • Bank of England rate decision and briefing, Thursday
  • OPEC+ convenes virtually for a regular meeting, Thursday
  • U.S. April jobs report, Friday

FX rates

USD/JPY @ 130.16 - bullish trend

EUR/USD @ 1.0522 - Bearish trend

GBP/USD @ 1.2495 - Bearish trend

AUD/USD @ 0.7104 - Bearish trend

USD/CNH @ 6.6484 - Bullish trend

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