The Capital Game Behind the HKD Appreciation: How Southbound Inflows and Long Positions Drive Exchange Rates

**Exchange Rate Breakout Review**

Since mid-August, the Hong Kong dollar has been accelerating in its appreciation against the US dollar. The USD/HKD has been declining from recent highs, and on August 19, it even fell to 7.79, marking the lowest level since May 2025. In just four trading days, it faced continuous pressure, then rebounded above 7.80 on August 20. This wave of HKD appreciation has attracted significant market attention.

**Southbound Capital Inflows Drive Surge in HKD Demand**

The fundamental reason for the HKD's appreciation stems from changes in the macro fundamentals. In mid-August, southbound capital flows into Hong Kong stocks showed a sustained net inflow, with a peak net purchase of 35.9 billion HKD on August 15. What does this mean? Large foreign capital entering the market requires converting foreign currency into HKD to buy Hong Kong stocks, and the surge in foreign exchange demand directly pushes up the HKD's value. Additionally, the Hong Kong Monetary Authority (HKMA) has been actively intervening in the market, further tightening HKD liquidity.

**Hedge Fund Position Liquidation Accelerates Appreciation**

Meanwhile, collective unwinding of long positions in USD/HKD by hedge funds has also contributed to the rally. According to Barclays Bank, about 30% of hedge funds' original long positions in USD/HKD have been closed out. These large-scale stop-loss operations are like adding fuel to the fire, further accelerating the HKD's upward movement.

**HKMA Liquidity Management Attitude Shifts**

It is worth noting that although the HKD has appreciated to 7.79, it is still some distance from the weak-side convertibility guarantee level of 7.85. This indicates that the HKMA's urgency to withdraw HKD liquidity is not as strong as expected, and its policy stance supporting HKD appreciation remains relatively moderate.

**Future Outlook: Limited Room for Further Appreciation**

Looking ahead, China Merchants Bank's analysis suggests that the HKD may experience moderate appreciation, but it is unlikely to reach the strong-side convertibility guarantee level of 7.75 in the short term. More importantly, the sustainability of southbound capital inflows will be a key variable in determining the HKD's future trend.

Most institutional consensus points to: unless the Federal Reserve initiates a significant rate cut cycle, the probability of the HKD continuing to strengthen against the USD remains relatively limited. In other words, the HKD's appreciation may have already approached a cyclical peak, and future developments will depend on the Fed's policy moves and changes in capital flows.