HKD: J.P. Morgan On Recent USD/HKD Weakness
The global bank weighs in on the recent sharp pullback in USD/HKD, looking at the drivers and whether or not we are likely to trend towards the bottom end of the peg band. It expects stability and still sees merit being outright long USD/HKD 12 month. See below more details.
J.P. Morgan: "...while the moves in HKD FX have been sharp in recent days the current set up appears quite a bit different to 1H25; we see it as unlikely that equity flows / flush out in carry trades alone will be able to drive USD/HKD back to the bottom end of the trading band. While equity inflows have persisted in recent sessions, they are only one of the three drivers that saw HKD FX trade at the bottom end of the trading band this earlier this year. The other two factors were (1) a much weaker DXY backdrop (which led to large moves in other FX pairs e.g. TWD) and (2) an arguably tighter level of starting AB. As such, if T/N can indeed stabilise at current levels -3 to -4pip (which annualised is 1095-1460pip ie more than covering the full width of the band) that carry trades will start to reassert themselves, and will leave upside pressure to USD/HKD on days when there is limited equity inflow.
As such, we hold onto outright long USD/HKD via 12m forwards (fwd entry: 7.7211, fwd latest: 7.7496, total return: +285pip). We prefer outright positions over directly paying points given that in the event equity flows were to slow near-term, points can trade marginally lower (but that would be more than offset by the spot move, making outright forward positions more attractive than a points view). Outright positions also continue to provide positive roll, with forward levels past the 9M tenor trading outside the band."
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