The Hong Kong dollar is nearing the weak end of its trading band at 7.85 per US dollar, a phenomenon attributed to the renewed attractiveness of carry trades. This comes as multi-year low volatility and inexpensive borrowing rates in Hong Kong encourage traders to borrow the local currency to invest in the higher-yielding US dollar.
Implied volatility for the dollar/Hong Kong dollar one-year has fallen to its lowest point since January 2022. This subdued market environment, partly influenced by a lack of demand for US dollars in Hong Kong following the start of the Iran war, provides a conducive backdrop for investors to short the Hong Kong dollar, thereby pushing it towards the 7.85 limit of its 7.75-7.85 per dollar range.
Previously, in August 2025, the Hong Kong dollar strengthened significantly to the middle of its trading range, reaching as much as 7.7991 per dollar. This rebound was due to stock inflows and a surge in the Hong Kong Interbank Offered Rate (Hibor), which made carry trades less appealing at the time. Authorities had engineered a cash squeeze to ease pressure on the currency's peg, causing the one-month Hibor to roughly triple in five sessions.
However, the current situation contrasts with August 2025, where soaring funding costs led many to believe the carry trade was "over." Despite the previous rate hikes, hedge funds continued to engage in Hong Kong dollar carry trades, albeit at a reduced scale, and analysts predicted a resurgence if the currency again hit the weak end of its band, forcing official intervention.
