The Hong Kong Monetary Authority (HKMA) has lowered its base interest rate by 25 basis points to 4.5%, following the U.S. Federal Reserve’s move. This change is part of the HKMA’s effort to keep the Hong Kong Dollar (HKD) closely tied to the U.S. Dollar (USD). Since 1983, the HKD has been pegged to the USD within a narrow range of about 7.8 HKD to 1 USD, allowing for slight variations. To maintain this peg, the HKMA adjusts interest rates to align with those of the U.S.

The Impact On Rates

If interest rates in Hong Kong rise, it would likely lead to more USD entering the market, increasing demand for HKD and disrupting the exchange rate. Lower rates could result in HKD being exchanged for USD, putting the peg at risk. The HKMA typically sets its benchmark rate about 50 basis points higher than the Fed’s rate. This helps keep the currency stable and discourages a strong preference for USD over HKD. With the HKMA cutting its base rate to 4.5%, this was a necessary step to preserve the peg with the U.S. dollar. Traders anticipated this move, so attention is now on its effects rather than surprise. The HKD has been trading towards the weaker side of its 7.75-7.85 range for months, recently hitting 7.845, indicating capital outflows due to higher U.S. rates.

Opportunities For Traders

For traders dealing in derivatives, this rate cut may reduce the pressure on the Hong Kong dollar. The interest rate difference, or the HIBOR-SOFR spread, should narrow, making it less appealing to short the HKD. Recently, the one-month spread has dropped from over 150 basis points during peak tightening in 2024 to about 90 basis points just before this cut. This rate cut is also a positive signal for the Hang Seng Index (HSI). We might consider taking long positions in HSI futures, as lower borrowing costs will benefit the city’s heavily indebted property developers and tech firms, which are major components of the index. A similar situation occurred in late 2019 when Fed rate cuts helped boost the HSI. In the options market, the clarity around this rate decision should reduce short-term implied volatility. The Hang Seng Volatility Index (VHSI) has already dropped by 5% this week in anticipation and is now around 19, below its average for the year. This presents an opportunity to sell volatility with strategies like short strangles on the HSI, provided no new geopolitical issues arise. The struggling property market, which saw a 12% drop in residential property transactions in Q2 2025, may be on the verge of recovery. We can expect increased interest in options for major property stocks like Sun Hung Kai Properties. Buying call options set to expire in three to six months could be a smart way to prepare for a recovery in market sentiment. This rate cut likely signals the start of a larger easing cycle, not just a one-time measure. The CME FedWatch Tool currently suggests more than a 65% chance of another U.S. rate cut by March 2026. Thus, derivative strategies should be designed to take advantage of a continued decline in interest rates over the next several quarters. Create your live VT Markets account and start trading now.

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