Recently, I saw news about the Hong Kong dollar appreciating, and it made me notice that the USD/HKD had once fallen to 7.79—an uncommon situation in recent months. I looked into the background and realized that two forces were working at the same time: on one side, the Hong Kong stock market attracted a significant inflow of southbound funds, which increased demand for exchanging into Hong Kong dollars; on the other side, hedge funds that had previously gone long USD/HKD began closing their positions, with roughly 30% of their long exposure already closed.

This phenomenon of the HKD strengthening looks quite interesting, but I don’t think it will keep rising indefinitely. The main reason is that the HKD exchange rate has already moved away from the Hong Kong Monetary Authority’s weak-side guarantee line of 7.85, so their motivation to withdraw Hong Kong dollar liquidity is not strong. Also, whether southbound funds will continue to flow in is still a question mark, and that directly affects how much the HKD can appreciate. The analysis from China Merchants Bank is similar: it believes the HKD may appreciate moderately, but in the short term it probably won’t return to the strong-side guarantee level of 7.75.

Looking at views from other institutions, most people generally believe that if the Federal Reserve doesn’t make a major rate cut, the upside room for the HKD to keep strengthening against the USD is limited. So, this round of HKD appreciation is likely just a phase of a rebound and won’t turn into a long-term trend.