Tony Kim
Jun 25, 2025 20:33
The Hong Kong Monetary Authority responds to the triggering of the weak-side Convertibility Undertaking, affecting the Hong Kong dollar’s stability and market dynamics.
The Hong Kong Monetary Authority (HKMA) has issued a statement in response to recent media inquiries regarding the triggering of the weak-side Convertibility Undertaking (CU) under the Linked Exchange Rate System (LERS). This development has implications for the Hong Kong dollar’s (HKD) stability and market dynamics, according to the HKMA.
Triggering of the Weak-Side Convertibility Undertaking
The weak-side CU, set at HK$7.85 to US$1, was activated during New York trading hours, prompting the HKMA to sell US$9.42 billion in exchange for Hong Kong dollars upon banks’ requests. As a result, the Aggregate Balance is projected to decline to HK$164.1 billion by June 27. This is the first activation of the weak-side CU since May 2023.
Market Dynamics and Liquidity Impact
Eddie Yue, Chief Executive of the HKMA, elaborated on the factors contributing to this event. He noted that the strong-side CU was triggered multiple times in early May, resulting in substantial inflows amounting to HK$129.4 billion. The influx of liquidity led to a decrease in HKD interbank rates, which, coupled with the widened HKD-USD interest rate differential, spurred carry trade activities that weakened the HKD exchange rate.
Additionally, the market’s demand for HKD has recently waned due to several factors. These include the conclusion of the stock dividend payout season, currency conversion activities for repatriation by non-local companies following recent initial public offerings (IPOs) or bond issuances, and the seasonal half-year-end funding preparations.
Future Implications and Monitoring
The HKMA advises the public to remain vigilant in managing interest rate and market risks. Depending on capital flow directions and HKD supply-demand conditions, further triggering of the weak-side CU is possible. As the Aggregate Balance decreases, a rise in HKD interbank rates may occur, aligning with the LERS framework.
The HKMA is committed to closely monitoring market developments and external conditions to maintain the orderly operation of Hong Kong dollar markets.
For more information, visit the Hong Kong Monetary Authority.
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