## Hong Kong Dollar Breaks Three-Month High, USD/HKD Outlook Faces Turning Point

In mid-August, the Hong Kong dollar experienced a significant appreciation trend. On August 19, USD/HKD dipped to 7.79, declining for four consecutive trading days and reaching the lowest level since May 2025. Subsequently, the exchange rate slightly rebounded above 7.80, but the appreciation trend has become a fact.

## Net Southbound Capital Inflows Drive Appreciation, Institutional Long Positions Accelerate Rebound

The appreciation of the Hong Kong dollar is not accidental; two main forces are at play. First is the shift in capital flows in the Hong Kong stock market. From August 14 to 19, southbound funds into Hong Kong stocks continued to net inflow, with a single-day net purchase reaching HKD 35.9 billion on August 15, creating substantial demand for HKD exchange. This capital flow directly boosted the relative strength of the Hong Kong dollar.

Second, adjustments in holdings by institutional investors such as hedge funds also played a catalytic role. According to estimates from Barclays Bank, about 30% of the long USD/HKD positions in the market have been closed out. The concentrated repurchase of speculative positions further accelerated the appreciation of the HKD. Coupled with the Hong Kong Monetary Authority’s previous ongoing interventions, these three forces converged, causing the HKD to face liquidity tightening at times.

## Short-term Rebound Does Not Change Long-term Pattern, Exchange Rate Guarantee Remains Key Support

Although the Hong Kong dollar has recently performed strongly, its potential for further appreciation may be limited. Currently, the exchange rate has already moved away from the HKMA’s set weak-side exchange rate guarantee of 7.85, indicating that the HKMA’s proactive efforts to withdraw HKD liquidity have weakened. Meanwhile, the sustainability of southbound capital inflows remains uncertain; if capital inflows slow down, the HKD’s rally may struggle to continue.

Institutions like China Merchants Bank have a relatively conservative outlook, believing that the HKD will indeed appreciate moderately in the short term, but the likelihood of returning to the strong-side exchange rate guarantee of 7.75 is low. More market voices suggest that unless the Federal Reserve initiates a significant rate cut cycle, the probability of the USD/HKD continuing to rise is limited, and the future is more likely to see range-bound fluctuations.