The Zhitong Finance App learned that the Federal Reserve raised interest rates for the first time in three years last month. Interest spreads between Hong Kong and the US continued to widen, and the Hong Kong dollar exchange rate weakened, once again drawing the market's attention to the trend of the Hong Kong dollar. On October 6, Yu Weiwen, Chief Executive of the Hong Kong Monetary Authority, looked forward to the short-term trend of Hong Kong's foreign exchange, which is affected by several factors, including capital market activity, market appetite for arbitrage trading, local market liquidity conditions, and the outlook for the Federal Reserve's monetary policy. As far as the current situation is concerned, if Hong Kong and the US maintain clear interest spreads, the automatic interest rate adjustment mechanism of the joint exchange system will cause the Hong Kong dollar to weaken, and even trigger the “weak party exchange guarantee” to reduce the bank system's aggregate balance, gradually increase the Hong Kong dollar interest rate, and stabilize the Hong Kong dollar exchange rate between 7.75-7.85 to the US dollar exchange guarantee level. This is where the joint exchange system is designed and works effectively. However, whether and when the “weak party exchange guarantee” will be triggered is affected by the above various factors, making it difficult to accurately predict.
According to reports, the Hong Kong foreign exchange rate generally rose and fell between 7.8300 and 7.8380 between April and May, but gradually weakened from mid-June, until recently hovering around 7.8460-7.8475, further approaching the 7.8500 underdog exchange guarantee. This mainly reflects the impact of two major factors: arbitrage trading induced by the widening interest spread between the Hong Kong dollar and the US dollar, and the decline in demand for the Hong Kong dollar associated with the stock market.
The Federal Open Market Committee of the US Federal Reserve decided to raise the federal funds rate target by 25 basis points at its September policy meeting. The statement issued after the committee meeting reiterated that inflation is at a high level. The chairman stated that the current monetary policy is still biased towards easing, reflecting that if inflation continues to be above target, there is room for the Federal Reserve to take further action to suppress inflation. The tense geopolitical situation, rising energy prices, and the US economy maintained rapid growth due to the boom in artificial intelligence investment. These factors increased inflationary pressure through various channels. The expected path for the market to raise US dollar interest rates is generally expected. If inflation shows no signs of falling back, it is estimated that the Fed may need to raise interest rates again within 2026 to the first half of 2027. On the other hand, with the exception of a few individual days, the Hong Kong dollar interest rate remained low compared to the US dollar interest rate. Expectations of interest spreads between Hong Kong and the US have induced markets, including interbank and short-term capital, to reduce Hong Kong dollar positions due to interest spread considerations, weakening Hong Kong's exchange rate.
Yu Weiwen mentioned that the short interest rate of the Hong Kong dollar is dominated by the supply and demand of the Hong Kong dollar. Recently, the global stock market has repeated, and local stock market trading has declined from a high level in the middle of this year. The impact of earlier large-scale fund-raising activities has subsided, causing related Hong Kong dollar demand to slow slightly. Furthermore, the period of strong demand for capital such as quarterly settlements and dividend payments by listed companies has just passed, and the related demand for Hong Kong dollars has declined, which is also the reason for the weakening of Hong Kong's exchange rate.
In the current uncertain global economic and financial environment and frequent changes in capital flows, the Hong Kong Monetary Authority will closely monitor financial market conditions and maintain Hong Kong's monetary stability through a linked exchange rate system. As for interest rates on deposits and loans, banks generally consider factors such as capital supply and demand in the interbank market, interest rates and current interest rate levels, and their own capital cost structure to assess whether adjustments are needed and the extent of the adjustments. The public should fully consider and manage interest rate risk when making home purchase, investment or borrowing decisions.