Will the Hong Kong dollar continue to appreciate against the Taiwan dollar? 2024 Exchange Rate Trend Analysis: What’s Next After 4.05

Hong Kong dollar and New Taiwan dollar are important currencies in Asia, with frequent economic and trade exchanges between the two regions. According to statistics, Hong Kong has become the largest source of visitors to Taiwan in 2023. Therefore, fluctuations in the HKD to TWD exchange rate have practical impacts on businessmen, investors, and travelers. This article helps you understand the logic behind the HKD to TWD exchange rate movements.

Why is the HKD pegged to the USD?

The story of the HKD begins during British rule. In 1983, Hong Kong officially implemented a linked exchange rate system, fixing the HKD within a range of 7.8 HKD to 1 USD. Simply put, the Hong Kong Monetary Authority commits to maintaining this ratio between 7.85 and 7.75—buying HKD when it’s too weak, selling HKD when it’s too strong.

This mechanism has continued for over 40 years, linking the fate of the HKD to the USD. When the USD appreciates, the HKD follows; when the USD depreciates, the HKD also depreciates. Therefore, understanding the trend of HKD against TWD mainly depends on US interest rates and economic policies.

How has the HKD to TWD exchange rate moved over the past 20 years?

From 2007 to now, the HKD to TWD has fluctuated between 3.5 and 4.5, showing an overall downward trend. In 2009, it briefly rose above 4.5, but in early 2022, it fell to a low of 3.5.

After 2022, the HKD to TWD started to rebound, but the rebound was limited, often encountering resistance around 4.15 and pulling back. Entering 2024, influenced by US inflation data exceeding expectations, the USD strengthened again, and the HKD to TWD rebounded from 3.905 to 4.05.

In the medium term, the HKD to TWD remains constrained by a downward channel, with 4.15 as an important resistance level.

Will the HKD to TWD rise or fall in 2024?

It depends on the US interest rate reduction process. If the Federal Reserve begins cutting rates as expected, historical experience suggests that the HKD to TWD will decline significantly during a rate-cutting cycle. During the rate cuts in 2008 and 2019, the declines were 9.88% and 13.17%, respectively. Based on this logic, a 10% drop from 4.15 would bring it to approximately 3.735.

However, if the US economy remains strong or geopolitical tensions push oil prices higher, causing inflation to rebound, the Fed may delay or pause rate cuts. In this scenario, the HKD to TWD could continue to rise, with the first target around 4.15.

In short: Rate cuts → HKD to TWD declines; Strong US economy and inflation → HKD to TWD rises.

Three major factors influencing the HKD to TWD

1. US interest rate policy

Since the HKD is pegged to the USD, capital flows are free, so it must follow US interest rates. When the US raises rates, the USD appreciates, and the HKD to TWD tends to rise; when the US cuts rates, the USD depreciates, and the HKD to TWD tends to fall. Economic indicators like non-farm payrolls and CPI influence market expectations of US policy.

2. Taiwan’s economic outlook

When Taiwan’s economy improves, foreign capital inflows increase, requiring more TWD to invest in Taiwan stocks, which pushes up the TWD’s value and causes the HKD to TWD to decline. Conversely, during economic downturns, the TWD depreciates, and the HKD to TWD rises.

For example, in the second half of 2021, Taiwan’s GDP growth reached 6.1%, boosting the TWD, and the HKD to TWD fell to 3.5. After 2022, Taiwan’s economy contracted significantly, the TWD depreciated, and the HKD to TWD rebounded to 4.15. Political factors also matter; after Lai Ching-te’s victory in January 2024, the Legislative Yuan lacked a majority, reducing market confidence in the new government and negatively impacting the TWD.

3. Global economic risks

When global risks rise, investors tend to buy USD for safe-haven, which appreciates the USD and drives up the HKD. Meanwhile, capital outflows from Asian markets are negative for the TWD. Therefore, the HKD to TWD exchange rate is sensitive to global risk sentiment.

Will the HKD detach from the USD?

The debate over whether the HKD will decouple from the USD has persisted. After the 1998 Asian financial crisis, currencies like Japan and Korea depreciated, attracting capital back and leading to rapid recovery. Hong Kong, due to its USD peg, couldn’t adopt similar measures, and its economy remained sluggish until gradually improving around 2003.

In recent years, with China’s economic rise and the internationalization of the RMB, some voices advocate for pegging the HKD to the RMB. However, the HKD’s linked exchange rate mechanism has withstood decades of testing, and investors have confidence in it. Unless there are super crises like US sanctions or war, the risk of decoupling remains low.

Common questions from investors

Q: How will the HKD to TWD trend develop?

A: In 2024-2025, the US is expected to enter a rate-cutting cycle, so the HKD to TWD is likely to decline significantly. But if the economy performs better than expected or geopolitical tensions escalate, delaying rate cuts, the trend could differ.

Q: How to judge the HKD to TWD movement?

A: Long-term (annual) focus on US interest rate policies; secondarily, monitor Taiwan’s economic outlook. For short-term (intraday trading), technical analysis and pattern recognition can help.

Q: Is arbitrage within the 7.85-7.75 range feasible?

A: Theoretically yes, but after deducting interest, time costs, and transaction fees, it’s practically difficult for retail investors.

Q: How can Taiwanese investors trade HKD to TWD?

A: Through bank currency exchange or via forex trading platforms for HKD/TWD trading.

Summary

The HKD to TWD exchange rate is not isolated; it reflects the strength of the USD, Taiwan’s economic conditions, and global risk appetite. The 4.05 level in 2024 is just a midpoint; future direction depends on the Fed’s rate decisions and Taiwan’s political and economic developments. Investors should pay close attention to US CPI data and Taiwan’s economic growth, as these are key indicators for predicting the HKD to TWD trend.