USD/HKD Volatility and Carry Trade Dynamics: Barclays' Strategic Outlook Amid Unwinding Speculative Positions

The USD/HKD exchange rate, long anchored by Hong Kong's Linked Exchange Rate System (LERS), has entered a period of recalibration amid shifting macroeconomic dynamics. Barclays' recent strategic forex forecasts highlight a narrowing volatility range and the gradual unwinding of speculative carry trade positions, offering critical insights for investors navigating this corner of the foreign exchange market.

A Stabilizing Outlook: Barclays' 2025–2026 Projections

According to a report by Barclays, the USD/HKD pair is expected to consolidate near 7.79 in the near term, reflecting a stabilization phase after months of volatility driven by interest rate differentials and global economic uncertaintyBarclays expects USD/HKD to consolidate near 7.79 amid carry trade unwinding^[1]. The bank's projections indicate a decline to 7.7850 by September 2025—a 0.33% drop from the current rate of 7.8107—as tighter monetary policy in the U.S. and accommodative conditions in Hong Kong narrow the yield gapUS Dollar to Hong Kong Dollar Forecast 2025–2026^[2]. By December 2025, the rate is forecast to settle at 7.7700, with a slight rebound to 7.7850 anticipated by March 2026US Dollar to Hong Kong Dollar Forecast 2025–2026^[2]. These movements underscore the LERS' role in curbing excessive swings, as the Hong Kong Monetary Authority (HKMA) has intervened aggressively to maintain stability, including liquidity injections in May 2025 that pushed short-term interbank rates to historic lowsRecent dynamics in the Hong Kong dollar market^[3].

Carry Trade Unwinding: A Catalyst for Near-Term Volatility

Barclays attributes much of the recent USD/HKD volatility to the unwinding of speculative carry trade positions. Data from the bank suggests that approximately 30% of the USD42 billion in long USD/HKD positions—equivalent to USD200 billion after leverage—have already been liquidated, driven by HKMA interventions and August's price actionBarclays expects USD/HKD to consolidate near 7.79 amid carry trade unwinding^[1]. This unwinding reflects a broader reevaluation of risk as the U.S.-Hong Kong interest rate differential narrows. With the Fed signaling a delayed rate-cutting cycle and Hong Kong's interbank rates remaining subdued, the incentive to borrow Hong Kong dollars and lend in U.S. dollars has diminishedBarclays Forecasts USD/HKD Consolidation at 779^[4]. As a result, speculative flows are expected to moderate, with Barclays projecting the pair to trade within a 7.75–7.80 range by 2026Barclays expects USD/HKD to consolidate near 7.79 amid carry trade unwinding^[1].

Broader Macroeconomic Headwinds and Policy Uncertainty

The bank's Q2 2025 Global Outlook highlights compounding risks to the USD/HKD dynamic, including rising global tariffs and policy uncertaintyQ2 2025 Global Outlook | Barclays Investment Bank^[5]. A potential slowdown in major economies could amplify pressure on the Hong Kong dollar, though the LERS provides a structural floor for its value. Barclays notes that the Fed's eventual rate cuts—projected for late 2026—may further narrow the yield differential, reducing the appeal of USD carry tradesBarclays Forecasts USD/HKD Consolidation at 779^[4]. For now, however, the interplay between HKMA liquidity management and Fed policy remains the dominant driver of short-term volatility.

Implications for Investors

For investors, the near-term outlook suggests caution in overexposure to USD/HKD carry trades. While the pair's range-bound trajectory offers limited directional risk, the unwinding of speculative positions could trigger sharp intraday swings, particularly around HKMA interventions or Fed rate decisions. Positioning in options or hedging instruments may be prudent for those with significant exposure. Conversely, the projected stabilization at 7.79 presents opportunities for long-term investors to capitalize on the LERS' inherent stability, provided broader economic risks remain contained.

Conclusion

Barclays' analysis underscores a pivotal phase for USD/HKD dynamics, where carry trade unwinding and central bank interventions are reshaping the landscape. While the immediate forecast points to consolidation, the interplay of global macroeconomic forces and policy shifts will dictate the pair's trajectory in 2026. Investors must remain attuned to these evolving conditions, balancing short-term volatility with the structural resilience of Hong Kong's currency framework.