Hong Kong dollar nears 7.85 weak limit as carry trades build
Why it matters: A wider US-Hong Kong rate gap and falling Hibor are raising the odds of Hong Kong Monetary Authority intervention.
The Hong Kong dollar is drifting toward the weak end of its 7.75-7.85 trading band as low volatility and cheap local funding encourage traders to short the currency against the US dollar. The currency held near 7.84 on Thursday, while one-year implied volatility fell to its lowest level since January 2022. Overnight Hibor has dropped by nearly 60 basis points this month, and the gap between one-month Hibor and the one-month Secured Overnight Financing Rate was about 67 basis points, reinforcing the carry trade. Analysts at DBS and OCBC said muted demand for cash, weaker local equities and limited haven demand during the Iran conflict have kept pressure on Hong Kong rates contained. Markets are already pricing the possibility that the HKMA may need to step in if the currency reaches 7.85.