HKMA Chief Executive Eddie Yue: Soft HKD Reflects Two Main Factors as the Linked Exchange Rate System Works as Designed

On October 6, Hong Kong Monetary Authority (HKMA) Chief Executive Eddie Yue commented on the recent performance of the Hong Kong dollar, saying that after the Federal Reserve raised rates for the first time in three years last month, the interest rate differential between Hong Kong and the United States widened and the Hong Kong dollar weakened, prompting some market participants and the public to focus on the currency's trajectory again. The Hong Kong dollar traded broadly between 7.8300 and 7.8380 during April and May, then gradually weakened from mid-June and has recently hovered at around 7.8460-7.8475, moving closer to the weak-side Convertibility Undertaking at 7.8500.

This mainly reflects two factors: carry trades triggered 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.

Looking at the Hong Kong dollar's short-term outlook, several factors are at play, including capital market activity, the market's appetite for carry trades, local market liquidity conditions and the outlook for US monetary policy. Under current circumstances, if a marked interest rate differential between Hong Kong and the United States persists, the automatic interest rate adjustment mechanism of the Linked Exchange Rate System will cause the Hong Kong dollar to weaken and may even trigger the weak-side Convertibility Undertaking, reducing the Aggregate Balance of the banking system, gradually pushing up Hong Kong dollar interbank rates and stabilizing the Hong Kong dollar exchange rate within the Convertibility Zone of 7.75-7.85 per US dollar.

This is how the Linked Exchange Rate System is designed and represents its effective normal operation. However, whether and when the weak-side Convertibility Undertaking will be triggered is subject to the many factors above and is difficult to predict accurately.