Hong Kong Central Bank Intervention
- HKMA is selling HK$60.543 billion to the market as the Hong Kong dollar hits the strong end of its trading range.
Since 1983, the Hong Kong dollar (HKD) has been pegged to the US dollar under a linked exchange rate system designed to maintain exchange rate stability and foster investor confidence. This peg keeps the HKD at roughly 7.80 to the US dollar, allowing for a trading range between 7.75 and 7.85.
The HKMA employs an auto-tuning mechanism to ensure the HKD stays within this allowable band.
- Monetary Commission System: The HKMA manages the Monetary Commission’s operations, guaranteeing that all HKDs issued are backed by US dollar reserves at fixed interest rates. Consequently, changes in the financial base, which includes the volume of currency in circulation and bank reserves, are directly tied to foreign exchange inflows or outflows.
- Intervention Mechanism:
- When the HKD nears the strong side of 7.75, the HKMA sells HKD to purchase US dollars, thereby injecting liquidity into the financial system.
- Conversely, if the HKD approaches the weak side of 7.85, the HKMA takes the opposite action, acquiring HKD and selling US dollars to withdraw liquidity. This approach helps maintain the exchange rate within the target band.
I mentioned last week that Goldman Sachs remarked on how the Asian FX market would benefit from the US dollar:
On Friday, the Taiwan Dollar experienced an unusual shift, showing a 19 standard deviation movement.
Honestly, I’m not just thankful for that TWD.
