Hong Kong dollar exchange rate rapidly weakens! The US dollar breaks through 7.83 against the HKD, reaching a multi-year high. Where should investors go from here?

May’s HKD performance was remarkable, with the USD/HKD breaking through the 7.83 level on May 21, reaching a new one-year high. Behind this rapid depreciation, there reflects significant changes in capital flows.

The Behind-the-Scenes Drivers of HKD Depreciation

Since May, the weak trend of the HKD has gradually emerged. The main reason is the significant shrinkage of net southbound capital inflows, and the previously supporting demand for the HKD has also begun to retreat. Along with some position unwinding, the downward pressure on the HKD has become more evident. At the same time, changes in capital flows have further accelerated the upward trend of USD/HKD.

Hong Kong Monetary Authority’s Exchange Rate Defense Line

Investors familiar with the HKD mechanism know that the HKD operates under a pegged exchange rate system and is not freely floating. The Hong Kong Monetary Authority plays a key role by actively intervening to maintain exchange rate stability.

Specifically, when USD/HKD falls to 7.75 (strong-side guarantee), the HKMA will buy USD and inject HKD to provide support. Conversely, when USD/HKD rises to 7.85 (weak-side guarantee), the HKMA will sell USD and absorb HKD, creating pressure. This operational mechanism ensures the exchange rate fluctuates within a certain range.

How to Assess Future Trends?

As the HKMA gradually restores control over HKD liquidity, analysts expect the HKD to stabilize gradually around 7.80. At the current price levels, market participants should cautiously evaluate the subsequent development of USD/HKD. From a technical perspective, shorting opportunities may be relatively more favorable than going long.