The Hong Kong dollar (HKD) has exhibited persistent weakness over the past two months, trading near the upper limit of its pegged range against the US dollar. As recent forecasts indicate, USDHKD has been consistently oscillating at the upper boundary of the 7.75 to 7.85 peg, even touching 7.85 for the first time since 2023. Factors driving this trend include significant outflows due to heightened demand for carry trades, fueled by a substantial interest rate differential between the US and Hong Kong, which now stands at 4.4%.
The Hong Kong Monetary Authority (HKMA) has intervened in an effort to stabilize the HKD, but analysts suggest that unless there is a notable shift in the Federal Reserve's policy stance, further softness in the HKD may be expected. Economic indicators such as a 3.1% year-on-year GDP growth in Q1 and easing inflation at 1.9% in May provide a mixed picture of the local economy. While these figures suggest a degree of resilience, the increase in unemployment to 3.5% and a lack of robust domestic demand signal underlying economic challenges.
Recent developments regarding tourism restrictions have been relaxed, but overall sentiment regarding the economic outlook remains pessimistic. Economists emphasize that the future strength of the HKD is contingent on a sustained recovery in the local economy and the direction of the Fed's monetary policy. While government measures intended to support the property market have been introduced, such as adjusting stamp duties and easing mortgage lending, these efforts have not yet translated into significant strength for the HKD.
Price data for key HKD currency pairs reveals that HKD to USD is at a 90-day low of 0.1274, maintaining a stable 0.9% trading range, while HKD to EUR has dipped to 7-day lows near 0.1091, representing a 1.4% decline from its 3-month average. Meanwhile, HKD to GBP is also at 7-day lows near 0.094709, remaining close to its 3-month average. In contrast, HKD to JPY is slightly higher, trading at 18.72, just above its 3-month average of 18.59.
Market analysts suggest that unless global market conditions change significantly or the Fed signals a policy pivot, the HKD is likely to remain under pressure, potentially testing the upper limits of its peg band. This backdrop highlights the importance of monitoring economic developments both locally and internationally for individuals and businesses engaged in international transactions.
