HKD to TWD Trend Key Analysis | In 2024, the Hong Kong dollar against the Taiwan dollar rises from 3.9 to 4.05, how will it move this year?

The roles of the Hong Kong dollar and the New Taiwan dollar in Asian trade are significant. According to data from Taiwan’s Tourism Bureau, Hong Kong visitors became the largest source of inbound travelers to Taiwan in 2023, reaching 770,000 visits. This figure reflects the close economic and trade ties between the two regions and also highlights the impact of HKD to TWD exchange rate fluctuations on actual business activities.

The Origin of HKD: From Spanish Silver Dollars to the Linked Exchange Rate System

The story of the Hong Kong dollar begins during the British occupation of Hong Kong in 1841. Initially, foreign currencies such as Spanish silver dollars and Mexican dollars circulated, until 1862 when the Hong Kong government began issuing its own banknotes. Over the past century, the HKD has experienced multiple phases: the silver standard, the pound sterling peg, the dollar peg, and finally, a free-floating regime.

A turning point occurred on October 17, 1983—Hong Kong officially implemented the Linked Exchange Rate System, fixing the HKD at a rate of 7.8 HKD to 1 USD. How does this mechanism work? When the Hong Kong dollar weakens, the Hong Kong Monetary Authority (HKMA) sells USD and buys HKD at the 7.85 level to maintain a floor; when the HKD strengthens, the HKMA sells HKD and buys USD at the 7.75 level. This system has persisted to this day, serving as the core support for HKD stability.

HKD to TWD Trend Analysis | 17 Years of Fluctuations

Since 2007, the historical trajectory of HKD/TWD has been clearly visible: operating around a central value of 4, with fluctuations between 3.5 and 4.5, showing a slow downward trend overall.

Specifically, in early 2009, the rate briefly rose above 4.5, while in January 2022, it touched a low of 3.5. After 2022, the HKD to TWD exchange rate rebounded strongly, but was consistently resisted by the upper boundary of the downward channel, encountering significant resistance around 4.15.

Key Turning Point for HKD to TWD in 2024

Since the beginning of the year, HKD to TWD has risen from 3.905 to 4.05. What are the driving forces behind this?

US Dollar Appreciation Factors: In February, US CPI and PPI data both exceeded expectations, dispelling market optimism about rate cuts starting in March. The unexpected rise in inflation data caused the USD to strengthen rapidly.

TWD Depreciation Pressure: DPP candidate Lai Ching-te won the January election, but the Legislative Yuan did not hold a majority, leading investors to doubt cross-strait relations and the new government’s policy capacity. Uncertainty in capital flows was clearly negative for the TWD.

These two forces jointly drove the rebound of HKD against TWD.

Forecast for the Year: Rate Cut Cycle as the Main Driver

Based on historical patterns, the peg of HKD to USD means that the Federal Reserve’s monetary policy direction will profoundly influence HKD to TWD movements.

Bearish Scenario: The Fed enters a rate-cutting cycle in 2024-2025 (high probability). Past experiences show that during rate cut cycles, HKD/TWD fell by 9.88% in 2008 and by 13.17% in 2019. Calculating a 10% decline from the high of 4.15, the target would be around 3.735.

Bullish Scenario: If the US economy continues to grow strongly, or geopolitical factors push up oil prices and stimulate inflation, the Fed may delay rate cuts or tighten policies. In this case, HKD/TWD is likely to rise, with the first target near the previous high and the top of the long-term channel at around 4.15.

Three Core Factors Affecting HKD to TWD

US Interest Rates and Federal Reserve Policy

Because HKD is pegged to USD and capital flows are free, interest rate trends are the strongest influence on the exchange rate. When markets expect US rate hikes or monetary tightening, the USD tends to strengthen, pushing HKD to TWD higher; otherwise, it declines. Key indicators include US non-farm payrolls, CPI, PPI, etc.

Taiwan’s Economic Fundamentals

Taiwan’s economic growth directly impacts foreign capital inflows and TWD demand. During the high-growth period in late 2021, with a 6.1% annual growth rate, capital inflows surged, TWD appreciated, and HKD to TWD fell to around 3.5.

The contrast is stark—after 2022, Taiwan’s growth slowed, even turned negative in early 2023, with less foreign investment, leading to TWD depreciation, while HKD to TWD rose from 3.5 to about 4.15.

Political factors also intervene. After Tsai Ing-wen’s election in 2015, cross-strait tensions increased, which is considered a key factor causing Taiwan’s economic growth rate to plunge from 3.7% in mid-2015 to 0.77% in mid-2016.

Global Risk Sentiment

When global economic risks rise, risk aversion drives capital into USD and HKD (pegged to USD), while capital exits Asian markets, directly negative for TWD. During such times, HKD to TWD is usually pushed higher.

Will the Peg Break? | Black Swan Risks for the Hong Kong Dollar

The discussion about disconnecting HKD from USD has been ongoing. After the 1998 Asian financial crisis, currencies of Japan, South Korea, and Southeast Asian countries depreciated, but this attracted capital inflows due to cheaper goods and services, leading to rapid economic recovery. However, Hong Kong, constrained by the linked exchange rate system, could not implement similar stimulus policies, resulting in long-term stagnation in stock, property, and real economy until the global recovery in 2003 and China’s accession to the WTO.

In recent years, with China’s economic rise, the internationalization of the RMB, and rising US-China tensions, some commentators believe the peg may not be sustainable forever, even suggesting switching the HKD to peg to the RMB for greater policy flexibility.

But in reality, after decades of tests through financial and political upheavals, the HKD has remained committed to the linked exchange rate system. Unless a US sanctions or war-level black swan event occurs, investors need not overly worry about this risk.

Trader Q&A You Must Read

Q1: What is the most likely direction for HKD to TWD this year?

A: With the market consensus that the US will enter a rate-cutting cycle in 2024-2025, HKD to TWD is likely to decline. However, in the short term, close attention should be paid to US economic indicators such as CPI and employment data to see if they continue to support the USD.

Q2: How can retail investors participate in HKD to TWD trading?

A: Taiwanese investors can exchange through banks or trade directly via forex platforms for HKD/TWD. Different channels have varying fees and exchange rates; it’s recommended to compare and choose accordingly.

Q3: When assessing the long-term trend of HKD to TWD, which factor should be prioritized?

A: For long-term annual trends, US monetary policy should be the primary focus, followed by Taiwan’s economic outlook. For intraday short-term trading, technical analysis and pattern recognition can be used.

Q4: Is it possible to arbitrage within the 7.85-7.75 linked exchange rate band?

A: In theory, yes, but in practice, one must account for interest, holding costs, and transaction fees. For retail traders, the profit margins are often eroded by these costs, making it less feasible.