- The Hong Kong Monetary Authority pegs the HKD to the USD at a range of 7.75-7.85.
- A rise in US yields threatens to disrupt this rigid currency peg.
- Hong Kong yields/rates would have to also rise as the HKMA buys HKD (reducing local HKD liquidity) and to prevent carry trade outflows into the USD.
- Hong Kong's economy, equity, and housing markets cannot tolerate higher yields/rates.
- The impossible trilemma in economics is maintaining a fixed exchange rate, zero capital controls, and an independent monetary policy.
For further details see:
The Emerging-Market Problem