Taking it back to the start, the Hong Kong dollar (HKD) linked itself to the U.S. dollar (USD) using a semi-peg system back in the early 1980s. What this means is that the Hong Kong Central Bank – also known as Hong Kong Monetary Authority (HKMA) – must control the supply and demand of HKD in order to keep it pegged to the USD at the agreed exchange rate.
Since May 2005, the pegged exchange rate trades within a band of 7.75 to 7.85HKD for every 1 USD; suggesting that if the HKD nears the bottom of the 7.75 edge (meaning it’s stronger), the HKMA must sell HKD and buy USD (to decrease the HKD’s value).
However, if the HKD nears the top of the 7.85 edge (meaning it’s weaker), the HKMA must buy HKD and sell USD (to increase the HKD’s value).
Mixing this up with the U.S. Federal Reserve’s tightening since late 2015, the U.S. dollar has soared in value causing capital to flow from Hong Kong into the U.S.
Despite the HKD weakening, the peg has proven resilient since it was conceived in 1983 and probably won’t break – here’s why we think so.