intro – hkd: hong kong dollar

Hong Kong Dollar(HKD) is the currency of Hong Kong. It is one of the top 10 most traded currency in the world. However, from a speculator point of view, it’s not very interesting. This is because value of the HKD is pegged to the USD via linked exchanged rate. The HKD is only allowed to fluctuate in the range of [ HKD 7.75 to HKD 7.85 ] per USD. We will discuss the reasons for this when we take a look at the history of HKD.

In-spite of being one of the most traded currency in the world, HKD is not a major reserve currency. Hong Kong Monetary Authority(HKMA) is responsible for governance of issuing HKD. It prints HKD in denominations of 10. In addition, HSBC, Standard Chartered Bank and Bank of China are licensed by HKMA to issue their own design banknotes. These banks have to deposit USD at the rate of around HKD 7.80 per USD to print equivalent amount of HKD.

At the time of writing this in 2020, there are question marks on the future of Hong Kong Dollar due to uncertainty around US-China trading relationship. However, HKMA has huge foreign exchange reserves to deal with a monetary crisis. In addition, it can always depend on People’s Bank of China, rather than the Fed. The former also holds vast reserves of USD.

HKD HKD origins

Hong Kong was established as a free trading port in 1841. At this point in time, there was no local currency in circulation. Instead, Indian Rupees and Mexican Dollars were the popular currencies. The British government tried to introduce sterling silver to Hong Kong. However, these attempts did not work. Over time, public confidence in the Mexican Silver dollars had grown and any unfamiliar coinage did not work.

This led to a realisation that local silver coins had to be minted. First one of these was the Hong Kong silver dollar coin that was minted in Hong Kong between 1866 and 1869. However, the Chinese were slow to accept unfamiliar coinage and preferred the familiar Mexican dollars. Therefore, the Hong Kong government ceased minting these coins and sold the mint machinery to Japan. The Japanese used it to start making the Japanese Yen.

In the 1860s, banknotes of the new British colonial banks, HSBC and the Chartered Bank of India, Australia and China, denominated in dollars, also began to circulate in Hong Kong and nearby trading routes. At this point, all dollars in the world had the same value. On par with the Spanish Mexican silver dollar, which is how they originated.

In 1873, the international silver crisis resulted in a devaluation of silver against gold-based currencies. The dollars in the US and Canada were attached to a gold exchange standard. So, this meant that the silver dollars circulating along the China coast dropped in value as compared to the US dollar and the Canadian dollar. This was the beginning of an international forex market.

FX Prediction HKD in early 20th century

Mexican Silver dollars had a major shortcoming for trade routes in Asia. Since, they were minted in latin america, by early 20th century, there was shortage of Mexican Silver dollars in Asia. Therefore local currencies were minted by British territories. One of these was the British Trade Dollar minted in India and was used along Hong Kong, Singapore, Malaysia and Australia.

By 1935, only Hong Kong and China remained on the silver standard. In that year, Hong Kong, abandoned silver standard and introduced a crawling peg to sterling. At this point, Hong Kong Dollar came into existence as the currency we know today with the value pegged in range of [ HKD 15.36 to HKD 16.45] per Pound Sterling. Hong Kong Government was never willing to take up the logistics of issuing paper currency. The public had greater degree of confidence in the existing HKD notes issued by long-established banks.

During the Japanese occupation, the Japanese military yen was the only means of everyday exchange in Hong Kong. When the yen was first introduced in 1941, the exchange rate was JPY 1 = HKD 2. However, the following year, rate was changed to JPY 1 = HKD 4. Military Yen stopped being a legal tender after the Japanese surrender in 1945.

HKD 99 year lease

Hong Kong was an important trading outpost of the British Empire. Therefore, following the opium wars, China and Britain signed Convention for the Extension of Hong Kong Territory in 1898. As per this agreement, the British government got Hong Kong and lower Kowloon peninsula on a rent free lease of 99 years. Apart from a brief period during Japanese occupation of Hong Kong, between 1941-1945, Hong Kong was a British dependent territory from 1898-1997.

As discussed earlier, post World War II, HKD was pegged to Pound Sterling at pre-war rate. In 1960s, GBP value became unstable, with its role as official reserve currency of the world. UK devalued GBP in 1967. As a result, HKD went down in value as well. This caused issues for local Hong Kong businesses and British community in Hong Kong. After the US abandoned the convertibility between gold and the US dollar in 1971, followed by Britain, HKD was pegged to USD. The rate was HKD 5.65 = USD 1. Then, HKD 5.085 = USD 1 in 1973 revision and HKD 7.8 = USD 1 in 1983 revision.

HKD HKD in 21st century

Britain and China agreed “one country, two systems” principle under the terms of Sino-British Joint Declaration in 1984. This recognised the sovereignty of China over Hong Kong after 1997. However, it also allowed for Hong Kong to continue to operate with the current independent governance on a range of administrative areas. This was because of the global importance of Hong Kong as a strategic financial centre in Asia.

Hong Kong retains full autonomy with respect to currency issuance. The Hong Kong SAR government and three local banks (HSBC, Bank of China and Standard Chartered) issue currency in Hong Kong. The central bank – HKMA(Hong Kong Monetary Authority) is responsible for supervision and governance of issuing HKD. Also, a bank can issue HKD only if it has the equivalent exchange in USD on deposit.

The USD HKD currency peg creates direct influence of the US Federal Reserve on Hong Kong’s monetary policy. Hence the interest rates in US heavily influence interest rate change in Hong Kong. In addition speculators cannot use HKD to place proxy bets on renminbi fluctuation. Today, HKD trades within a range of [ HKD 7.75 to HKD 7.85 ] per USD.

HKD final comments

It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.

Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.

Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.

FX Prediction how to apply this to trading

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