Hong Kong Dollar Nears Weak-Side Convertibility Undertaking
The Hong Kong dollar is edging closer to the weak-side convertibility undertaking (CU) of 7.8500, a trend that began in mid-June. This shift is driven by the growing interest rate gap between the Hong Kong dollar and the US dollar, as well as reduced demand for the currency linked to equities. Eddie Yue Wai-man, chief executive of the Hong Kong Monetary Authority (HKMA), noted that the currency was trading between 7.8300 and 7.8380 in April and May but has since weakened to a range of 7.8460-7.8475.
Yue attributed the weakening to the Federal Reserve's rate hike in September, which signaled further potential increases if inflation remains elevated. He also highlighted external pressures such as artificial investments, geopolitical tensions, rising energy prices, and stronger US economic growth, all of which could sustain inflation and prompt additional rate hikes between late 2026 and early 2027.
The low interbank interest rates for the Hong Kong dollar compared to the US dollar have encouraged market participants, including banks, to reduce their Hong Kong dollar holdings, further weakening the currency. Additionally, demand for the Hong Kong dollar has declined due to reduced local equity market activity and the fading impact of earlier large-scale fundraising.
Seasonal factors, such as easing quarter-end liquidity needs and dividend payment periods, have also contributed to the decline in demand for the Hong Kong dollar, pushing it closer to the weak-side CU of 7.8500.