Bank of America Global Research has indicated that the possibility of further Federal Reserve rate hikes could weaken the Hong Kong dollar to 7.85 against the US dollar, potentially triggering intervention by the Hong Kong Monetary Authority (HKMA) and pushing up the Hong Kong Interbank Offered Rate (Hibor).

The firm believes that if the Fed raises rates further, there is a tail risk of a sharp spike in Hibor. Should the aggregate balance of the banking system decline further following HKMA intervention, the overnight Hibor could rise to 6%.

Bank of America’s US economists project that the Fed will implement three more rate hikes this year. If this forecast materializes, the widening interest rate differential between the US dollar and the Hong Kong dollar could push the Hong Kong dollar toward the weak side convertibility level. The bank notes that the current aggregate balance of the Hong Kong banking system is approximately HK$54 billion, already at a relatively low level.

If the HKMA steps in to intervene and further compresses the aggregate balance, Hibor could surge sharply. However, Bank of America points out that any such spike in Hibor is likely to be short-lived, as the impact of initial public offering settlements on interbank liquidity diminishes and the loan-to-deposit ratio remains at persistently low levels.

Despite this, the overall risk is still tilted toward the HKMA not needing to intervene. Even before the USD/HKD reaches 7.85, the risk of an imminent Hibor spike may deter traders from establishing new carry trade positions. Inflows into the Hong Kong stock market, along with uncertainty over the Fed's rate path, will also reduce the likelihood or frequency of triggering an intervention.