Hong Kong Dollar has been depreciating! Why?

The HKD is depreciating and is approaching the limit of HKD$7.85 (intervention level).  This is stressing the HKMA to up its interest rates to stabilize the HKD and prevent capital outflow.

The one-month Hibor-Libor spread is widening to 151 basis points and also giving HKMA the stress to up its interest rates because HKD is pegged to USD.  This causes HKD to depreciate unless HKMA ups its interest rates.  However, the dovish FED stance is giving HKMA some breathing space not to hike its interest rates because the HK interest rates will affect the property sector tremendously.

The 1-month HKD Hibor is at 1.33% and the 1-month CNY Hibor is at 2.72% (see chart below).  This creates a huge arbitrage opportunity for investors to sell HKD for CNY to net a risk-free return of 1.39%.  How cool is that?  This is the primary reason for HKD depreciation.