The Hong Kong dollar (HKD) has remained under significant pressure in recent weeks, driven by a wide interest rate gap between the US and Hong Kong that encourages outflows. As analysts noted, the USDHKD pair has been trading consistently at the upper bound of its peg band, approaching the 7.85 limit for the first time since 2023. The Hong Kong Monetary Authority (HKMA) has intervened to stabilize the currency, but forecasts suggest further weakness may persist unless there is a shift in Federal Reserve policy.
The latest economic metrics present a mixed picture. A year-on-year GDP growth rate of 3.1% in Q1 has not been enough to offset concerns about the economic outlook. Inflation eased to 1.9% in May, while the unemployment rate ticked up to 3.5%. Additionally, factors such as the completion of dividend payments by listed companies and the repatriation of funds from prior IPOs are also contributing to diminished demand for HKD.
Looking ahead, analysts predict that USDHKD is likely to remain near the upper half of its peg band. The appeal of carry trades is expected to continue, incentivizing outflows and maintaining pressure on the HKD. Although HKMA interventions could counteract tests of the band’s ceiling, the strength of FX reserves and policy credibility provide some reassurance. However, unless there is a notable shift in global sentiment or a more dovish stance from the Fed, the HKD may continue to stay soft.
Throughout this period, the HKD has demonstrated varied performance against other currencies. It reached 90-day lows against the USD at around 0.1274, slightly below its three-month average, while remaining more stable against the Euro and the pound, with recent highs of 0.1103 and 0.0954 respectively. Notably, the HKD to JPY exchange rate also showed strength, trading at 18.91, which is 1.8% above its three-month average.
In summary, while recent easing of tourism restrictions could provide some support to the local economy, sentiments remain cautious. The future strength of the HKD largely hinges on the trajectory of local economic recovery and the Federal Reserve’s upcoming policy decisions.
