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Hydro-climate in the montane cloud forest (MCF) regions is unique for its frequent fog occurrence and abundant water interception by tree canopies. Latent heat (LH) flux, the energy flux associated with evapotranspiration (ET), plays an essential role in modulating energy and hydrological cycles. However, how LH flux is partitioned between transpiration (stomatal evaporation) and evaporation (non-stomatal evaporation), and how it impacts local hydro-climate remain unclear. In this study, we investigate how fog modulates the energy and hydrological cycles of MCF by using a combination of in-situ observations and model simulations. We compare LH flux and associated micrometeorological conditions at two eddy-covariance sites—Chi-Lan (CL), a MCF, and Lien-Hua-Chih (LHC), a non-cloud forest in Taiwan. The comparison between the two sites reveals an asymmetric LH flux with an early peak at 9:00 in CL as opposed to LHC, where LH flux peaks at noon. The early peak of LH flux and its evaporative cooling dampen the increase in near-surface temperature during the morning hours in CL. The relatively small diurnal temperature range, abundant moisture brought by the valley wind, and local ET result in frequent afternoon fog formation. Fog water is then intercepted by the canopy, sustaining moist conditions throughout the night. To further illustrate this hydrological feedback, we used a land surface model to simulate how varying canopy water interception can affect surface energy and moisture budgets. Our study highlights the unique hydro-climatological cycle in MCF and, specifically, the inseparable relationship between the canopy and near-surface meteorology during the diurnal cycle.