Will 2024 HKD exchange rate trends reach a turning point? The logic behind HKD/TWD rebounding from 3.9 to 4.05

Frequent economic and trade exchanges between Hong Kong and Taiwan mean that the exchange rate trend of the Hong Kong dollar against the New Taiwan dollar directly impacts bilateral trade costs and investment returns. According to statistics from Taiwan’s Tourism Bureau, in 2023, Hong Kong tourists became the largest source of visitors to Taiwan, reaching 770,000 arrivals, illustrating the close economic ties between the two regions. So, why has the Hong Kong dollar exchange rate recently rebounded? What are the driving forces behind this? How will it develop in the future?

Current Core Changes in the Hong Kong Dollar Exchange Rate: The Dual Impact of a Strongening US Dollar and Taiwan’s Political Situation

Entering February 2024, the HKD/TWD exchange rate rebounded from 3.905 to around 4.05, an increase of over 3.8%. There are two main reasons for this rebound:

First, unexpectedly high US inflation data. In February, US CPI and PPI both exceeded expectations, reigniting concerns about inflation returning, which dampened the previously optimistic expectations of rate cuts starting in March, leading to a strengthening of the US dollar index. Since the Hong Kong dollar is pegged to the US dollar, the dollar’s appreciation directly pushed the HKD/TWD upward.

Second, changes in Taiwan’s political landscape brought uncertainty. DPP candidate Lai Ching-te won the January election, but the Legislative Yuan did not have a majority, raising concerns among investors about cross-strait relations and the new government’s policy capabilities. Capital shifted to a more conservative stance, putting pressure on the Taiwan dollar, which further pushed up the HKD/TWD exchange rate.

Long-term Logic of the HKD Exchange Rate Trend: The Stability of the Linked Exchange Rate System

To understand the HKD/TWD trend, it is essential to understand Hong Kong’s exchange rate mechanism. The history of the Hong Kong dollar dates back to 1841 during British colonial rule, with phases including the silver standard and the pound sterling peg. On October 17, 1983, Hong Kong officially implemented the Linked Exchange Rate System, fixing the HKD within a range of 7.8 HKD to 1 USD.

The core of this mechanism is: when the HKD is weak, the Hong Kong Monetary Authority (HKMA) sells US dollars at 7.85 to buy HKD (the weak-side guarantee); when the HKD is strong, the HKMA sells HKD at 7.75 to buy US dollars (the strong-side guarantee). This “dual commitment” ensures relative stability of the HKD and makes its movement highly synchronized with the US dollar.

Historical Patterns of HKD against TWD: A 20-year Oscillation Centered Around 4

From 2007 to the present, the HKD/TWD exchange rate has followed a clear logic: oscillating around 4, within a range of 3.5 to 4.5, trending downward.

In early 2009, it briefly broke above 4.5, while in January 2022, it hit a low of 3.5. In recent years, after bottoming out in 2022, the HKD has begun to rebound but remains constrained by the upper boundary of the downward channel, with resistance around 4.15. The current level of 4.05 is in the middle, reflecting a market balancing between different expectations.

Two Main Scenarios for the HKD/TWD Exchange Rate in 2024-2025

Scenario 1: Rate Cut Cycle Initiates, HKD/TWD Declines

The US Federal Reserve (Fed) will eventually start cutting rates, which is almost a consensus view, just a matter of timing. Historical data supports this: during the rate cut cycles of 2008 and 2019, the HKD/TWD depreciated by 9.88% and 13.17%, respectively.

If 2024 proceeds smoothly into a rate cut cycle, with a 10% decline from the 4.15 baseline, the HKD/TWD could fall to around 3.735. This would represent a significant depreciation, requiring investors holding HKD assets to plan ahead.

Scenario 2: Continued Economic Strength, HKD/TWD Appreciates

Alternatively, if the US economy continues to perform strongly, or geopolitical tensions push up oil prices and trigger inflation rebounds, the Fed may be forced to maintain high interest rates or tighten further. In this case, the HKD/TWD is likely to rise, with the first target at 4.15, the top of the long-term downward channel.

Three Major Factors Driving the HKD Exchange Rate

First Layer: US Interest Rate Policy

Since the HKD is pegged to the USD with free capital flows, its exchange rate inevitably follows US monetary policy changes. When market expectations favor US rate hikes or tightening, the dollar appreciates, pushing the HKD/TWD higher; conversely, expectations of rate cuts will lower the HKD. Key macroeconomic indicators such as US Non-Farm Payrolls, CPI, and PCE are critical for assessing policy directions.

Second Layer: Taiwan’s Economic Outlook

Taiwan’s economic health directly influences the strength of the TWD. In late 2021, Taiwan’s annual GDP growth reached a high of 6.1%, driven by strong capital investment and exports, which strengthened the TWD and caused the HKD/TWD to fall toward 3.5. Since 2022, Taiwan’s growth has slowed significantly, even turning negative in early 2023, weakening the TWD and causing the HKD/TWD to rise toward 4.15.

Cross-strait relations and political events also alter investor expectations. After Tsai Ing-wen’s election in 2015, tensions increased, and Taiwan’s growth rate dropped from a mid-term 3.7% to 0.77%, which in turn weakened the TWD.

Third Layer: Global Risk Sentiment

Global economic conditions influence risk appetite. When global risks rise, risk aversion supports the US dollar and HKD, while capital flows out of Asia, negatively impacting the TWD. Conversely, when risk appetite improves, capital shifts to emerging markets, benefiting the TWD, and the HKD/TWD exchange rate faces downward pressure.

The “Black Swan” Risks of the Linked Exchange Rate

Discussions about disconnecting the HKD from the USD have existed for many years. After the 1998 Asian financial crisis, currencies in Japan, Korea, and Southeast Asia depreciated, making goods and services cheaper and attracting capital inflows, leading to rapid economic recovery. However, Hong Kong, pegged to the USD, could not adopt similar policies, resulting in long-term stagnation in the stock, property, and real economy until 2003, when global economic recovery and China’s accession to the WTO helped resolve these issues.

Recently, with China’s economic rise and the internationalization of the RMB, coupled with tense US-China relations, some voices suggest that the HKD should be linked to the RMB to create a more independent international financial center. But the reality is that after multiple rounds of financial and political turbulence, the HKD has maintained the linked exchange rate mechanism. Unless facing extreme crises like US sanctions or war, investors need not overly worry about the stability of the linked system.

How Should Investors Respond?

Long-term perspective (annual level): Focus primarily on US monetary policy trends, followed by Taiwan’s economic outlook. During rate cut cycles, tend to be bearish on HKD/TWD; if the economy exceeds expectations and remains strong, tend to be bullish.

Short-term perspective (intraday trading): Use technical analysis and pattern recognition, combined with the 7.85-7.75 linked exchange rate range for swing trading. In theory, this range provides clear buy and sell boundaries, but considering interest costs, time costs, and transaction fees, actual profit margins are often limited.

Risk Management: The economic linkages between Hong Kong and Taiwan are quite mature, and exchange rate fluctuations are generally within controllable market ranges. However, during political uncertainties or sudden global risk events, increased vigilance is necessary.