With southbound outflows and arbitrage pressures, the Hong Kong Monetary Authority intervened three times in a week to stabilize the exchange rate market

Under the dual pressure of capital outflows and arbitrage positions, the Hong Kong Monetary Authority has intervened in the foreign exchange market three times within a week to stabilize the currency.

On Tuesday, the Hong Kong Monetary Authority purchased HKD 6.429 billion (approximately USD 819 million), continuing a series of measures to maintain exchange rate stability. Previously, the Hong Kong Monetary Authority had intervened in the foreign exchange market on August 1 and July 30. According to media calculations, the Monetary Authority has withdrawn a total of HKD 13.89 billion in liquidity from the market through the purchase of Hong Kong dollars within a week to maintain the exchange rate of the Hong Kong dollar against the US dollar within the range of 7.75-7.85.

On Monday, southbound funds had a net sell-off of approximately HKD 18.1 billion, the largest single-day net sell-off since May 12, exacerbating the downward pressure on the Hong Kong dollar. At the same time, the significant interest rate differential between Hong Kong and the United States continues to attract traders to short the Hong Kong dollar and buy higher-yielding US dollar assets.

Southbound Capital Outflows and Seasonal Factors Combined

Carie Li, a global market strategist at DBS Bank, pointed out: “The outflow of southbound funds and the weakening seasonal demand may dominate the pressure to sell the Hong Kong dollar.”

She stated that the huge interest rate differential will keep arbitrage trading active, and more intervention actions may be expected in the future.

The latest market intervention by the Hong Kong Monetary Authority is a continuation of a series of actions to curb the decline of the Hong Kong dollar since June. These actions are partly in response to the consequences of suppressing the appreciation of the Hong Kong dollar earlier this year. The Monetary Authority's earlier strategy of selling Hong Kong dollars led to a significant decline in local interest rates relative to the United States, thereby putting depreciation pressure on the Hong Kong dollar.

US Rate Cut Expectations May Provide Relief

However, the recent turnaround in US employment market data may provide some breathing room for the Monetary Authority. Last week, the US non-farm payroll data fell short of expectations, triggering market expectations for the Federal Reserve to accelerate rate cuts. If the interest rate differential between the two regions narrows, it may alleviate the pressure faced by the Monetary Authority.

Wee Khoon Chong, a senior Asia-Pacific market strategist at Bank of NY Mellon, stated: “The buying of USD/HKD may be driven by ongoing arbitrage trading. If the market factors in further rate cuts by the Federal Reserve after last week's weak US employment data, this situation may not last long.”

Under the linked exchange rate system, the Hong Kong monetary authority is responsible for intervening when the exchange rate of the Hong Kong dollar against the US dollar reaches the boundaries of the 7.75 to 7.85 range. Currently, it appears that as market dynamics continue to evolve, the Hong Kong Monetary Authority will continue to face challenges in maintaining currency stability while balancing the needs of the local interest rate environment and economic development