Recent fluctuations in the exchange rate and demand for the HKD have garnered significant market attention. During the National Day holiday, the HKD continued its strong appreciation, reaching a two-year high. This trend is primarily attributed to the surge in the Hong Kong stock market and accelerated capital inflows, which have driven a sharp increase in demand for the currency.

HKD Overnight Interest Rate Reaches an 18-Year High

On September 30, the overnight Hong Kong Interbank Offered Rate (Hibor) surged to 6.3926%, its highest level since 2006. Although it eased slightly to 5.4687% by October 7, the rate remained close to its second-highest point, indicating sustained strong demand for the HKD.

As the holiday period concluded and the A-share market resumed trading, domestic cross-border fund products, particularly active equity funds with significant Hong Kong stock exposure and prominent Hong Kong stock index funds, were expected to experience heightened demand for price adjustments. This likely triggered a new wave of capital inflows into the Hong Kong market, further bolstering demand for the HKD. On September 30, net southbound capital purchases amounted to RMB 12.1 billion, marking a short-term peak and driving the HKD overnight Hibor rate to a historic high.

In addition, private equity funds have continued to increase their allocations to Hong Kong stocks. According to the China Resources Trust Sunshine Private Equity Stock Long Index (CREFI Index) monthly report, the average allocation to Hong Kong stocks by private equity rose from 23.19% at the end of December 2023 to 34.33% by the end of August 2024. This upward trend signals growing confidence among institutional investors in the Hong Kong stock market and is expected to further sustain demand for the HKD.

The HKD is Positioned for Further Appreciation

Under the linked exchange rate system, the HKD is permitted to fluctuate within the 7.75 to 7.85 range against the US dollar. As of October 7, the USD/HKD exchange rate stood at 7.7654, continuing its slight appreciation and maintaining a position near a two-year high. Earlier, on October 2, the HKD reached an intraday high of 7.7618, setting a new record over the past two years.

Furthermore, expectations for further HKD appreciation in the forward exchange market are also robust. The three-month USD/HKD forward points have risen significantly, with the discount narrowing from a yearly low of -279.5 points on September 12 to -81 points on October 7, reaching a new high for the year. This indicates widespread market anticipation of further HKD appreciation in the near future.

With the reopening of the A-share market, domestic cross-border Hong Kong stock ETFs are expected to experience substantial price corrections, leading to significant capital inflows into Hong Kong stocks, which will further elevate demand for the HKD. Since September 19, the average daily turnover in the Hong Kong stock market has exceeded HKD 200 billion, doubling the average daily turnover in the first half of the year. According to China Securities, from August 12 to 14, the average daily turnover in the Hong Kong stock market was only HKD 70 billion, reflecting subdued market sentiment at the time. However, over the past 10 trading days, average daily turnover has rebounded significantly.

Moreover, the vibrant performance of the Hong Kong stock market has drawn increased attention from investors. During the National Day holiday, the Hang Seng Index rose by 9.30%, while the Technology Index and the China Enterprises Index gained 13.36% and 10.93%, respectively. At the same time, companies have accelerated their initial public offering (IPO) processes during the holiday, with firms such as Horizon Robotics, Lalamove, and BenQ Hospital submitting listing applications, while others like Taimei Medical and Qiniu Intelligent launched public offerings. Prominent investment firms, including Sequoia China, Hillhouse Capital, and Yunfeng Fund, have frequently appeared among the shareholders of these companies.