Late-night emergency! The Hong Kong Monetary Authority intervenes for the third time in a week to protect the exchange rate. What is happening to the Hong Kong dollar?

On the early morning of August 5th, Hong Kong's financial market once again witnessed a foreign exchange defense battle! This time, it was because the Hong Kong dollar's exchange rate against the US dollar touched the weak exchange guarantee of 7.85 (simply put, the "red line" of Hong Kong dollar depreciation), prompting the Hong Kong Monetary Authority to urgently enter the market during the New York trading session, buying 64.29 billion Hong Kong dollars and selling US dollars. This is the third intervention within a week (interventions also occurred on July 30th and August 1st), so why is the pressure on the Hong Kong dollar exchange rate continuing to increase? 1. Frequent triggering of the "red line," with the Monetary Authority intervening three times in a week: On August 5th, the Hong Kong dollar touched the weak exchange guarantee of 7.85, prompting the Monetary Authority to buy 64.29 billion Hong Kong dollars. The total balance of the Hong Kong banking system is expected to drop to 724.61 billion Hong Kong dollars the following day (the total balance is the interbank funds, and interventions directly affect it). Intervention pace: Since June, there has been continuous stabilization. In July, there was a brief pause for two weeks, but due to sudden pressure, interventions occurred three times in a week to support the market. 2. Why do they keep hitting the "red line"? Double squeeze of low interest rates and capital outflow from the stock market: The Hong Kong dollar operates under a linked exchange rate system, anchored between 7.75 and 7.85 (strong positions buy Hong Kong dollars, weak positions sell Hong Kong dollars). The continuous depreciation this time is due to two main pressures: 1. The "trap" of the Chinese-American interest rate differential: Hong Kong has maintained a low-interest-rate environment for a long time (the 1-month Hong Kong Interbank Offered Rate is close to 1%, much lower than the US dollar interest rate). The larger the interest rate differential, the more intense arbitrage trading becomes. Investors shorting the Hong Kong dollar and buying US dollars to profit from the interest rate differential directly puts pressure on the Hong Kong dollar exchange rate. 2. Capital outflow from Hong Kong stocks Bloomberg data shows that Chinese investors sold off Hong Kong stocks on Monday, marking the largest scale since May 12th. UBS trading data shows that on August 4th, sell signals for Hong Kong stocks accounted for 72%, with 4% being short positions. Trading departments are selling stocks from all sectors, with a focus on healthcare, consumer, and real estate sectors. The capital outflow from the stock market further reduces demand for Hong Kong dollars, compounding the depreciation pressure. 3. How long will this defense battle last? Experts say it depends on the Federal Reserve and the Hong Kong stock market: Strategists at DBS Bank warn that with capital outflows from Hong Kong stocks and weak seasonal demand, combined with high interest rate differentials, more interventions may be required in the future. On the other hand, New York Banks believe that if the US starts cutting interest rates due to weak employment data, the Chinese-American interest rate differential will narrow, potentially easing pressure on the Hong Kong dollar (as the driving force behind arbitrage trading weakens). Moreover, this exchange rate game is not isolated - the Indian Rupee also depreciated due to US tariff threats, prompting intervention by the Indian Central Bank. Fluctuations in emerging market exchange rates are intensifying! 4. How will this affect ordinary people? Consider these three points: 1. Are Hong Kong dollar assets stable? Monetary Authority interventions aim to maintain the 7.75-7.85 range, stabilizing short-term fluctuations for ordinary people holding Hong Kong dollar deposits and Hong Kong stocks. But in the long term, they still need to be aware of interest rate differentials and capital flows. 2. Will local interest rates soar? In theory, interventions will tighten liquidity and push up interest rates. However, the Hong Kong economy is fragile, and rapid rate hikes could have negative effects (e.g., soaring mortgage costs). For now, interest rates are expected to remain low, so mortgage holders need not worry. 3. What should investors be wary of? Investors in Hong Kong stocks and Hong Kong dollar assets need to closely monitor the Federal Reserve's policies (whether they cut interest rates) and the flow of foreign capital in the Hong Kong stock market. If interest rate differentials do not narrow, fluctuations may persist. The exchange rate game for the Hong Kong dollar ultimately boils down to the battle between the Chinese-American interest rate differential and capital flows. If the Federal Reserve does start cutting interest rates and capital flows back into the Hong Kong stock market, pressure may ease. However, as long as the interest rate differential remains high and capital continues to flow out of the stock market, the Monetary Authority may need to continue "supporting" the market.