HKD Peg: The Fed's Monetary Footprint

The year 2025 marked a turning point for Hong Kong's monetary system. For the first time since the establishment of its trading band in 2005, the Hong Kong dollar (HKD) tested both the strong and weak ends of its exchange rate corridor against the US dollar. Driven by the Federal Reserve's monetary cycle and erratic capital flows, these oscillations forced the Hong Kong Monetary Authority (HKMA) into significant and often contradictory interventions, subjecting the peg to an unprecedented stress test. A direct consequence was significant volatility in HIBOR rates. This study deciphers this new dynamic, analyzes the mechanism's robustness, and provides an outlook for navigating 2026.Our analysis concludes that the HKD peg remains sustainable. The interventions are not a sign of weakness but rather proof of its proper functioning, underpinned by ample foreign exchange reserves and unwavering political will. However, investors should expect continued strong volatility in 2026. While HIBOR rates will follow the Fed's downward trend, their trajectory will be bumpy. The spot USD/HKD will continue to trade between 7.75 and 7.85, but with a downward bias towards 7.75 as the Fed lowers its policy rates.