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HKMA: If Carry Trades Continue, HKD May Weaken Further and Trigger Weak-side Convertibility Undertaking
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The Federal Reserve maintained the federal funds rate target range at 4.25-4.5%. The Hong Kong Monetary Authority (HKMA) said that the policy decision is in line with market expectations. The “dot plot” released following the meeting indicated that the Fed might cut rates by a total of 50 bps before year end. However, the market generally considers that the pace of future rate cuts remains quite uncertain as it is dependent on US inflation and labor market data developments, as well as the impact of tariff and other economic policies on economic activities. The HKMA added that the interest rate differential between the Hong Kong dollar and the US dollar widened, incentivising carry trades, leading to the easing of the Hong Kong dollar towards the weak-side Convertibility Undertaking level of 7.85 over the past few weeks. Going forward, the outlook for the Hong Kong dollar market and for interbank rates remains uncertain due to various factors, including carry trades, the supply-demand conditions for Hong Kong dollars created by capital market activities, as well as other seasonal factors. If carry trades are to persist, the Hong Kong dollar exchange rate may weaken further, and may even trigger the weak-side Convertibility Undertaking. In such a case, the HKMA would then sell US dollars in exchange for Hong Kong dollars in accordance with the LERS, leading to a corresponding decline in the Aggregate Balance, hence driving Hong Kong dollar interbank rates to gradually increase. AASTOCKS Financial News Website: www.aastocks.com |
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