HONG KONG
The Hong Kong dollar traded near 7.84 per US dollar Thursday, pressing against the weak end of its fixed range of 7.75 to 7.85, as carry trades intensified on the back of a 67 basis point interest rate gap between Hong Kong and U.S. rates.
The strategy pivots on borrowing cheap in Hong Kong and selling the local currency against higher-yielding dollars. Multi-year lows in USD/HKD volatility—one-year implied volatility has dropped to its lowest since January 2022—remove the hedging friction that typically constrains carry positioning.
The one-month Hibor-SOFR spread stood near 67 basis points. Short-term borrowing costs in Hong Kong fell further in June, with overnight Hibor dropping close to 60 basis points, marking its largest June decline since 2006. A slump in local equities has curbed financing demand, leaving ample liquidity in the interbank market.
Carie Li, strategist at DBS Hong Kong, said carry trades remain attractive because "the low volatility of USD/HKD" reduces execution risk for large positions. She expects the currency to weaken to 7.85 within one to two months, anchored by the persistent US-Hong Kong rate gap and broad dollar strength.
Cindy Keung, economist at OCBC Bank (Hong Kong), noted that "persistent low funding costs and still sizeable USD-HKD rate differentials will likely continue to encourage carry trades." She cautioned that while the spot rate may take multiple weeks to reach 7.85, markets have already begun pricing in potential Hong Kong Monetary Authority intervention.
The currency has remained relatively stable this year after significant whipsaws in 2025, when the HKMA intervened multiple times to defend the peg as US dollar volatility and shifting funding costs drove swings between the band's extremes.
