It would work to a certain extent, ie the Encoder DROs would change with the scales however the axes position DROs would not. In other words you could use the Encoder feedback as you wish but to switch back to CNC you would have to rehome so that Mach once again knows where it is. You could, I suppose, have some VB in a button to check position and update the Axes DROS when you switch back to CNC rather than homing but probably just simpler to rehome.
There are a few external controllers that can take encoder feedback and use that to update the axes DROs so that even manually turning the axes the position DROs in Mach get updated and thus Mach always knows where it is, one being the CSMIO/IP-A that I use on my Chiron. These controllers tend to be for analogue command drives rather than step/dir, the Hicon however may also be capable of this and it is Step/Dir but check to make sure if you want to go down that route as I have never used one, so cant be 100% certain.
Hood