Hong Kong Dollar to Taiwan Dollar Exchange Rate 2024 Trend Forecast: When Will HKD to TWD Bottom Out? Rebound from 4.05 Indicates Future Direction

Why is the HKD to TWD exchange rate oscillating around the 4-level?

As important trading currencies in Asia, the exchange rates of the HKD and TWD directly reflect the vitality of economic and trade exchanges between the two regions. According to data, Hong Kong has become the largest source of travelers to Taiwan, with frequent personnel and capital flows. However, many investors may not realize that the HKD to TWD exchange rate movement is not arbitrary but is influenced by multiple precise factors.

How the linked exchange rate system determines the HKD’s ceiling

In October 1983, Hong Kong officially implemented the linked exchange rate system, fixing the HKD to a peg within the range of 7.8 HKD to 1 USD. This mechanism has been in operation for over 40 years, serving as a key safeguard for the stability of the HKD. The Hong Kong Monetary Authority (HKMA) maintains the exchange rate stability by intervening at two points: buying HKD at 7.85 when the HKD is too weak, and selling HKD at 7.75 when it is too strong.

The existence of this linked exchange rate framework means that the long-term trend of the HKD must follow the USD. In other words, predicting the HKD to TWD trend essentially involves forecasting the relative strength of the USD against the TWD.

20 years of HKD to TWD oscillation: why does it keep revolving around the 4-level?

Since 2007, the HKD to TWD exchange rate has been oscillating within the 3.5 to 4.5 range, with the center close to 4. The market has experienced two critical turning points:

2009 brief break below 4.0: The HKD to TWD once surged past 4.5, then retreated back to the 3.5-4.0 range.

2022 deep adjustment: The HKD to TWD fell to around 3.5, hitting a recent low.

After bottoming out in 2022, the HKD to TWD rebounded sharply but faced significant resistance around 4.15. In early 2024, driven by a strong USD, the HKD/TWD rebounded from 3.905 to about 4.05. Whether this level can break through depends on subsequent signals from US monetary policy.

How will the HKD to TWD exchange rate move in 2024-2025? All depends on the Fed

Key influence of US CPI data

In February 2024, US CPI and PPI data both exceeded expectations, breaking market hopes for a rate cut in March and pushing the dollar to strengthen again. As a currency pegged to the USD, the HKD naturally appreciated, raising the HKD/TWD rate.

Historical patterns during rate cut cycles

However, historical experience shows that US rate cut cycles often lead to a decline in the HKD to TWD. Reviewing past instances:

• During the 2008 global financial crisis rate cut cycle, the HKD to TWD fell by 9.88%
• In 2019, after three Fed rate cuts, the HKD to TWD declined by 13.17%

Unless black swan events (such as war, sanctions, or energy crises) reignite inflation fears, it is unlikely that 2024-2025 will avoid entering a rate-cutting cycle. Logically, the HKD to TWD will likely face downward pressure. A 10% decline from the previous high of 4.15 would target around 3.735.

Another scenario with rising risks

If the US economy continues to outperform expectations or geopolitical crises push oil prices higher, fueling inflation, the Fed may delay or even tighten monetary policy. In this scenario, the USD and HKD could continue to strengthen, and the HKD to TWD could rise, with initial targets at the previous high of 4.15 and the top of the long-term downtrend channel.

Taiwan’s economic outlook as the second driving force

Besides US interest rates, Taiwan’s own economic performance is also a key variable influencing the HKD to TWD trend.

Relationship between economic health and TWD strength

In the second half of 2021, Taiwan’s GDP growth reached an ultra-high 6.1%, with strong capital investment and exports, leading to large foreign capital inflows and a strengthening TWD. At that time, the HKD to TWD fell close to 3.5.

Since 2022, Taiwan’s economic growth has noticeably slowed, with exports and investment growth decelerating, even turning negative in early 2023. As the TWD depreciated relative to the HKD, the HKD to TWD rose back to around 4.15. This indicates that Taiwan’s economic vitality directly influences foreign capital flows and thus impacts the TWD exchange rate.

Hidden impact of political uncertainty

In January 2024, Taiwan’s election results saw DPP candidate Lai Ching-te win, but the Legislative Yuan did not secure a majority. This outcome triggered market concerns over cross-strait relations and the new government’s governance capacity, creating short-term negative pressure on the TWD and further pushing up the HKD to TWD rate.

Historical political shifts also bring economic shocks. After Tsai Ing-wen’s election in 2015, cross-strait relations became tense, and Taiwan’s economic growth rate sharply declined from 3.7% to 0.77%.

Global risk sentiment as an invisible amplifier

When the global economy deteriorates, risk aversion dominates capital flows. The USD, as the global safe-haven currency, tends to strengthen, benefiting the HKD linked to it. Meanwhile, capital tends to withdraw from Asian emerging markets, adding downward pressure on the TWD. During periods of rising global risks, the HKD to TWD often performs strongly.

Will the linked exchange rate collapse? The black swan risk for HKD

In recent years, discussions about whether the HKD should detach from the USD peg have occasionally surfaced. Proponents argue that if the HKD could float freely like other Asian currencies, Hong Kong would gain greater monetary policy flexibility and economic stimulus.

Historically, after the 1998 Asian financial crisis, Japan, South Korea, and Southeast Asian countries allowed their currencies to depreciate to boost exports, leading to rapid economic recovery. But Hong Kong, due to the need to peg to the USD, could not adopt similar policies, resulting in prolonged stagnation in its stock, property, and real economy.

Recently, with China’s economic rise, the internationalization of the RMB, and tense US-China relations, some speculate that Hong Kong might switch to a RMB peg, becoming a financial center different from New York and London.

But the reality is: The HKD linked exchange rate system has withstood decades of market testing. Only in extreme crises like US sanctions or war against Hong Kong would this mechanism likely be shaken. Investors need not worry excessively.

How to practically trade HKD to TWD?

Long-term focus on US interest rate trends

To judge the HKD/TWD trend on an annual basis, the primary focus should be on US monetary policy cycles. FOMC minutes, statements, and non-farm payroll data are key indicators.

Short-term trading can leverage technical analysis

Day traders or weekly traders can use chart patterns and technical tools to find buy/sell opportunities within the 4.0-4.15 range. However, note that the linked exchange rate range of 7.75-7.85 appears as a “riskless arbitrage” opportunity, but after deducting interest, time costs, and transaction fees, retail traders’ feasibility is very low.

Main trading channels are banks and forex platforms

Taiwan investors can directly exchange HKD and TWD at banks or trade HKD to TWD derivatives on forex platforms for more flexible participation.

Summary: How to view HKD to TWD in 2024?

The short-term rebound of HKD to 4.05 is just a phase. From a medium-term perspective, the arrival of a US rate cut cycle is almost certain, implying downward pressure on the HKD. But if global economic or geopolitical situations change dramatically, USD and HKD could still break upward.

Investors should continuously monitor US monetary policy signals, Taiwan’s economic data, and global risk sentiment to dynamically adjust their outlook on HKD/TWD. Until a clear rate cut is confirmed, the 4.0-4.15 range for HKD to TWD may continue to oscillate, and patience in waiting for directional signals is the wisest approach.