MNI: HKD To Hold Firm On Mainland Equity Flows

The Hong Kong dollar is likely to remain supported by Chinese mainland firms listing in the city and overseas capital inflows following potential U.S. Federal Reserve rate cuts, forex experts told MNI, though they noted it is unlikely to repeat the sharp rally against the greenback seen in early May as mainland inflows into equities slow.

HKD is expected to stay away from the weak-side convertibility guarantee of 7.85 per U.S. dollar in the near term, supported by capital flows and the broader greenback trend, said Zhao Qingming, a veteran international finance expert. Demand for HKD remains steady as Hong Kong’s stock market draws listings from Chinese and A-share companies, many of which have posted solid gains, he added. Global investors also continue to view both A- and H-shares positively in terms of valuation and growth prospects, Zhao argued.

The currency is currently trading near 7.80 after rebounding from 7.85 in mid-August, helped by Hong Kong Monetary Authority (HKMA) liquidity withdrawals and the previous soft U.S. dollar. The HKD has seen wide swings this year, hitting 7.75 in May on U.S. tariff-driven capital inflows before falling back to 7.85 in late June as the HKMA injected liquidity, pushing down HIBOR and fuelling carry trades. (See MNI: PBOC To Make Slight Cuts In Q4, A-Share Rally Welcomed)

HIBOR HIJINKS

HIBOR dynamics remain central. After the HKMA injected HKD129.4 billion in May, 1M HIBOR slumped from an April average of 3.65% to just 0.67%. Since June, however, the HKMA’s continued liquidity draining has lifted 1M HIBOR back to 3.14%. 

A Hong Kong-based forex trader said the narrowing U.S.-HK rate spread has sharply reduced carry trade opportunities, helping to stabilise the HKD. The monetary authority appears less urgent about defending the weak-side than the strong-side, preferring to let the market adjust, he added. 

Zhou Hao, chief economist at Guotai Junan International, said HIBOR’s rebound represents a mean reversion after being too low earlier. While HKD rates will likely remain below U.S. rates in the medium term, the HKMA cannot allow a persistent gap given the linked exchange rate system, he cautioned. A move back to the strong side cannot be ruled out, though HKD liquidity remains ample and the currency peg will be maintained, Zhou continued. 

CAPITAL FLOW

Capital inflows from the mainland have driven the market since mid-August, with Stock Connect transactions accounting for more than 50% of total turnover on the Hong Kong Exchange. (See MNI INTERVIEW: HK Eyes CNH Stablecoin For Asset Expansion)

Sun Bin, chief analyst at the China Foreign Exchange Investment Research Institute, cautioned that the equity-driven boost to HKD strength may pause as the Hang Seng shifts to a steadier climb, reducing chances of a strong-side rally.

The HSCEI has risen about 27% this year, but has been largely rangebound around the 9,000 handle since July. 

The HKD showed signs of intraday resistance to further gains last week, Sun added, noting the currency’s strength has been closely tied to A-shares in this bull market, with the Connect programs easing yuan-HKD conversion and enabling overseas flows into mainland equities.

Zhao added that Fed rate cuts could also spur inflows into Hong Kong’s property market. After years of sluggish activity due to high rates, lower borrowing costs and continued housing demand from mainland households relocating under the Talent Admission Scheme could lift the sector, further supporting HKD liquidity.