Hong Kong Monetary Authority Intervenes to Defend HKD

Due to continued capital outflows from the stock market and persistently low local interest rates, the Hong Kong dollar (HKD) exchange rate has hit the weak side of its Convertibility Undertaking. As a result, the Hong Kong Monetary Authority (HKMA) has intervened in the market four times in one week to buy HKD, in a strong effort to stabilize the local currency exchange rate.

According to statistics, the HKMA bought a total of HKD 22.326 billion in four operations, attempting to maintain the exchange rate peg at 7.75-7.85 HKD per US dollar. On August 6th, the HKMA bought another HKD 8.439 billion in the market. Prior to this, on August 5th, the HKMA bought HKD 6.429 billion in the market, on August 1st it bought HKD 3.533 billion, and on July 31st it bought HKD 3.925 billion.

The re-initiation of exchange rate intervention highlights the current situation in which the HKD is under sustained pressure. Because Hong Kong interest rates are relatively low, and the interest rate differential with the United States remains large, this encourages market speculators to sell HKD and switch to pursuing higher-yielding US dollar assets. In addition, data shows that Southbound capital flows sold approximately RMB 18.1 billion on Monday, marking the largest single-day net sale since May 12th, exacerbating the downward pressure on the HKD.

Carie Li, Global Market Strategist at DBS Bank, points out:

"Outflows from Southbound capital, coupled with weaker seasonal demand, make the situation where the HKD is under pressure dominant. As long as the interest rate differential remains at its current level, arbitrage trades will remain active, and the HKMA may have to continue intervening in the market in the future."

The HKMA began intervening in the market to support the HKD in June, in order to counter the adverse effect caused by curbing the strength of the HKD at the beginning of the year. At that time, the HKD continued to appreciate, and the HKMA had to continuously sell the local currency, which led to a significant decline in local interest rates, and the interest rate differential with the US continued to widen, creating new downward pressure on the HKD.

Foreign media reported that this "anti-depreciation battle" may be protracted for Hong Kong. Withdrawing liquidity too quickly may drive up local interest rates, further impacting its economic performance. However, last week's disappointing US non-farm payrolls data increased market expectations that the Federal Reserve will cut interest rates, and if the interest rate differential between Hong Kong and the US narrows as a result, it may provide a respite for the HKD. Market participants will be closely watching the next Federal Reserve meeting for clues on future monetary policy.

Wee Khoon Chong, Senior Market Strategist for Asia Pacific at Bank of New York Mellon, stated:

"Current buying of USD/HKD is largely driven by arbitrage trades, but if the market begins to expect the Federal Reserve to accelerate the pace of interest rate cuts, this arbitrage behavior may soon weaken."

In addition, other Asian markets have recently intervened frequently to defend their currencies. With the Indian rupee exchange rate approaching historic lows, and US President Trump threatening to impose additional tariffs on India, the move by Indian state-owned banks to enter the market and buy foreign currency is also seen as an intervention signal from the country's central bank, although the bank kept interest rates unchanged in its latest monetary policy decision. These actions highlight the challenges facing emerging market economies in a global environment of fluctuating capital flows and trade tensions. The focus for investors is understanding the underlying economic fundamentals and policy responses that drive these interventions. Analysis often includes examination of trade balances, inflation rates, and government debt levels.

The future direction of the HKD will likely depend on a combination of factors, including the actions of the HKMA, the monetary policy decisions of the US Federal Reserve, and the overall global economic climate.