From Yahoo Finance: 2025-06-12 19:30:00

An unprecedented disconnect between Hong Kong and US interest rates has fueled the world’s top-performing carry trade, sparking debate on the city’s pegged exchange rate. Hong Kong’s currency has weakened towards the lower end of its trading band against the US dollar, leading to a surge in demand for the higher-yielding US currency.

The Hong Kong Interbank Offered Rate dropped to its lowest level since 2022 due to the HKMA’s liquidity injection. Anemic corporate loan demand and a post-pandemic economic slump have contributed to low interest rates, with the loan-to-deposit ratio falling to a 16-year low in March.

Concerns are rising that aggressive intervention by the HKMA as the Hong Kong dollar nears the lower end of its trading band may disrupt the city’s property market recovery and stock listings rebound. Discussions on the benefits of the rigid currency peg have resurfaced amid economic distortions.

Outstanding dollar call options betting on the Hong Kong currency reaching beyond HK$7.85 have increased to $51 billion, while contracts longing the US dollar against Hong Kong’s currency have seen record-high annualized carry trade returns. Speculative investors like Kyle Bass and Bill Ackman have targeted the peg but it remains intact.

Suggestions to reform or abandon the peg have been plentiful over the years, but authorities prefer the status quo for now. Chief Executive John Lee affirmed the city’s commitment to the peg, citing it as a key success factor amidst geopolitical tensions and rejecting calls to abandon the link.

The current peg to the US dollar has supporting factors, as the US currency is fully convertible and widely traded on foreign exchange markets. Despite calls for change, pegging to the most important currency in the world remains beneficial until the yuan becomes fully convertible, offering an alternative for Chinese capital to go overseas.

The risk of a full-blown crisis for the city’s currency peg is remote, with Hong Kong stocks performing well and mainland Chinese investors contributing to equity inflows. However, the Hong Kong dollar is expected to weaken in the near term due to the carry trade, with estimates suggesting liquidity draining amid official intervention.

©2025 Bloomberg L.P.



Read more at Yahoo Finance: World’s Top Carry Trade Renews Debate Over Hong Kong Dollar Peg