Hong Kong central bank intervention
- HKMA sells HK$ 60.543 bln into market as Hong Kong dollar hits strong end of trading range
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Since 1983, the HKD has been pegged to the U.S. dollar under a Linked Exchange Rate System (LERS), ensuring exchange rate stability and promoting investor confidence. The peg ties the HKD at approximately 7.80 per U.S. dollar, with a permitted trading range of 7.75 to 7.85.
The HKMA uses an automatic adjustment mechanism to keep the HKD within its allowed band:
- Currency Board System: The HKMA operates a currency board arrangement, ensuring every HKD issued is backed by U.S. dollar reserves at a fixed rate. This means changes in the monetary base (the sum of currency in circulation and bank reserves) are directly tied to foreign exchange inflows or outflows.
- Intervention Mechanism:
- When the HKD approaches the strong side of 7.75, the HKMA sells HKD and buys U.S. dollars, injecting liquidity into the financial system.
- When the HKD nears the weak side of 7.85, the HKMA does the reverse—buying HKD and selling U.S. dollars, withdrawing liquidity.
This ensures exchange rate stability within the target band.
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I posted last week on Goldman Sachs mentioning that Asian FX would appreciate vs. the USD:
On Friday the Taiwan dollar had an impossible move, a 19 standard deviation move higher:
Its not just TWD appreciating.
