On October 6, Eddie Yue Wai-man, Chief Executive of the Hong Kong Monetary Authority (HKMA), discussed the short-term outlook for the Hong Kong dollar exchange rate, noting it is influenced by several factors including capital market activity, market appetite for carry trades, local market liquidity conditions, and the outlook for US Federal Reserve monetary policy.
According to Zhihong Financial News, the Fed raised rates for the first time in three years last month, the Hong Kong-US interest rate differential has continued to widen, and the Hong Kong dollar exchange rate has weakened somewhat, once again drawing market attention to the Hong Kong dollar's trajectory.
Under current circumstances, if a notable interest rate differential between Hong Kong and US dollars persists, the Linked Exchange Rate System's automatic interest rate adjustment mechanism will cause the Hong Kong dollar to weaken, potentially even triggering the "weak-side Convertibility Undertaking," which would reduce the Aggregate Balance of the banking system, gradually push up Hong Kong dollar interbank rates, and stabilize the Hong Kong dollar exchange rate within the Convertibility Zone of 7.75 to 7.85 against the US dollar. This is the design of the Linked Exchange Rate System and its effective normal operation. However, whether and when the "weak-side Convertibility Undertaking" is triggered is influenced by the aforementioned multiple factors and is difficult to predict accurately.
According to the HKMA, the Hong Kong dollar moved broadly between 7.8300 and 7.8380 during April and May, then gradually weakened from mid-June, recently hovering around 7.8460 to 7.8475, moving closer to the weak-side Convertibility Undertaking level of 7.8500. This mainly reflects two major factors: carry trades induced by the widening interest rate differential between the Hong Kong dollar and the US dollar, and a decline in Hong Kong dollar demand related to the stock market.
The Federal Open Market Committee of the US Federal Reserve decided at its September policy meeting to raise the target federal funds rate by 25 basis points. The committee's post-meeting statement reiterated that inflation remains at a high level, and the Chairman expressed that current monetary policy remains accommodative, reflecting that if inflation continues to exceed target, the Fed has room to take further action to suppress inflation. Geopolitical tensions, rising energy prices, and faster US economic growth driven by an artificial intelligence investment boom have increased inflation pressure through various channels. The market has broadly raised its expected path for US dollar interest rates. If inflation shows no signs of easing, it is estimated that the Fed may need to raise rates again during 2026 through the first half of 2027.
On the other hand, except for a few isolated days, Hong Kong dollar interbank rates have remained at relatively low levels compared to US dollar rates. Expectations of a Hong Kong-US interest rate differential have prompted market participants, including interbank players and short-term funds, to reduce Hong Kong dollar positions due to interest rate considerations, keeping the Hong Kong dollar weak.
Yue noted that short-term Hong Kong dollar rates are dominated by Hong Kong dollar supply and demand. Recently, global stock markets have been volatile, local stock market turnover has declined from its mid-year highs, and the impact of earlier large-scale fundraising activities has faded, slightly slowing related Hong Kong dollar demand. In addition, the period of stronger funding demand from quarterly settlements and listed company dividend payments has just passed, reducing related Hong Kong dollar demand, which is also a reason for the Hong Kong dollar's weakness.
Amid an uncertain global economic and financial environment and frequent shifts in capital flows, the HKMA will closely monitor financial market conditions and maintain Hong Kong's monetary stability through the Linked Exchange Rate System. Regarding deposit and lending rates, banks generally consider factors such as interbank market fund supply and demand, interbank rates and current related interest rate levels, and their own funding cost structure to assess whether adjustments are needed and by how much. The public should fully consider and manage interest rate risk when making decisions on property purchases, investments, or borrowing.