Hong Kong dollar: 7.85, approaching rapidly

Since the beginning of the year, the main theme for the Hong Kong dollar has been depreciation. USDHKD rose from 7.7800 at the start of the year to 7.8470 in the third quarter, only 30 pips away from the weak-side conversion guarantee (7.85). With the weak-side guarantee so close, what's the outlook going forward?

Apart from the impact of southbound funds, another reason for the recent depreciation trend of the Hong Kong dollar is that Hong Kong dollar liquidity is relatively loose. Over the past month, the 1M Hibor rate fell from 2.9% to 2.6%. The overnight Hibor rate is even looser, around 2.0%. This has led to an expanded US-HK interest rate spread, and arbitrage activities further exert pressure on the HKD exchange rate.

It's worth noting that the decline in Hong Kong dollar rates this round comes with a significantly steeper curve. Short-term rates have declined sharply due to seasonal factors (the dividend payout peak has passed, etc.), while mid- to long-term rates are actually rising. The HKD Hibor curve is becoming noticeably steeper, reflecting that the market has started to anticipate HKMA's exchange rate intervention—selling US dollars and tightening Hong Kong dollar liquidity, which will directly lead to tighter HKD liquidity.

Strategically, it is a bit early to bet on Hong Kong dollar appreciation in the next phase, as HKD liquidity (especially at the short end) remains loose, and Hong Kong dollar fundamentals are still relatively weak.

When the spot HKD exchange rate is close to 7.85 and HKMA has not yet officially intervened, opportunities can be found in the forward rates. The rise in expectations for HKD intervention and narrowing Fed rate hike expectations may push the USDHKD forward rate further upward. Currently, the 12-month forward is around 7.78, and judging from history, there's still room.

Strategically, since the HKD swap curve is very steep, attempting to flatten the curve directly (B/S short end + S/B long end) would face significant negative carry pressure. I recommend buying the 1-year USDHKD forward.This move should bring steady happiness.

Summary of today's sharing:

2. It's worth noting that the decline in Hong Kong dollar rates this round comes with a significantly steeper yield curve. Mid- to long-term Hibor rates have edged up, reflecting that the market has begun to anticipate HKMA's exchange rate intervention.

3. In my view, it’s still a bit early to bet on Hong Kong dollar appreciation in the next phase, as HKD liquidity (especially at the short end) remains loose and Hong Kong dollar fundamentals are still relatively weak. When the spot HKD exchange rate is close to 7.85 and HKMA has not yet officially intervened, there are opportunities in the forward rate market, such as buying the 1-year USDHKD forward to reap steady returns.