US Dollar/Hong Kong Dollar FX Spot Rate

The Hong Kong Monetary Authority on the 17th raised its policy base rate by 0.25% to 4.25%, following the US Federal Reserve's rate hike. The HKMA said the widening interest rate gap between Hong Kong and the United States could spur carry trades and push the Hong Kong dollar toward the weak end of its trading band. The Hong Kong dollar fell to 7.8456 per US dollar in afternoon trading, hitting a one-month low. The currency is pegged to the US dollar in a narrow range of 7.75 to 7.85, and has been gradually drifting toward the weak end of that band in recent weeks. Chief Executive Eddie Yue told reporters that the interest rate gap between the Hong Kong dollar and the US dollar has widened, and carry trades could weaken the Hong Kong dollar toward the weak side of its permitted trading range. Samuel Tse, an interest rate strategist at DBS, said in a report that he does not expect HKMA intervention, and noted that a weaker US dollar on fiscal concerns, as well as the government's new five-year plan aimed at supporting the economy, are expected to underpin the Hong Kong dollar.

Investors are piling into carry trades by selling Hong Kong dollars and buying US dollars, pushing the Hong Kong currency toward 7.85 per US dollar, the weak end of its band under Hong Kong's Linked Exchange Rate System. Data from Depository Trust and Clearing Corp. show that on Wednesday, trading volume in call options on the US dollar against the Hong Kong dollar was about four times that of put options for contracts with notional values of at least 100 million dollars, reflecting that investors are still betting the Hong Kong dollar will weaken further. The Hong Kong dollar closed Wednesday almost unchanged at 7.8409 per US dollar, even as the US dollar weakened against most major currencies after the US Treasury announced an increase in the size of long-term government bond buybacks. A key factor is the still-wide interest rate differential between the United States and Hong Kong, with the one-month US Secured Overnight Financing Rate at about 3.65 percent while the comparable Hong Kong Interbank Offered Rate is around 2.63 percent, giving investors room to profit from the gap. A strategist at Bank of East Asia said the rate differential remains attractive, especially with currency volatility at low levels. However, as the Hong Kong dollar approaches the weak end of its trading band, some investors have begun taking profit on long US dollar versus Hong Kong dollar positions, helping the Hong Kong dollar recover somewhat over the past week. Citigroup's head of foreign exchange trading said some investors have reduced long US dollar versus Hong Kong dollar positions to lock in gains and are ready to re-enter if the pair pulls back. Still, the market sees risks over the coming weeks as tilted toward the US dollar versus Hong Kong dollar rising to 7.85, because overall investor positioning continues to favor a stronger US dollar against the Hong Kong dollar.