USD/ HKD once fell to 7.85 today (20th), the first time since 2023, as lower financing costs in Hong Kong triggered carry trades, Bloomberg quoted traders as saying.

Yesterday (19th), the Hong Kong Monetary Authority (HKMA) said that, if the carry trades continue, it may cause the HKD exchange rate to weaken further, and may even trigger the “weak-side Convertibility Undertaking (CU)”, in which case the HKMA will buy HKD and sell USD in accordance with the Linked Exchange Rate System (LERS).

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The total balance of the banking system will fall accordingly, while the HKD interbank rates will gradually rise.

USD/ HKD, which strengthened in May, peaked at 7.75, hitting the strong-side CU, causing the HKMA to inject large amounts of liquidity into the market, and further leading to a rapid appreciation of the HKD. However, at the same time, the HKMA reduced borrowing costs, and widened Hong Kong's interest spread with the US to a record level.

USD/ HKD now hovered around the edge of the weak-side CU at 7.8498.

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