The HKMA is buying HKD to support the local currency. Its hit the upper extreme of its trading band (ie strong USD/weak HKD) - more on this below.
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.
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.
Longer term chart. The HKMA are a determined bunch!
This article was written by Eamonn Sheridan at www.forexlive.com. Read More Details
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