Hong Kong's Monetary Authority gives banks two standing Convertibility Undertakings, promising to sell Hong Kong dollars at the strong side of the band and buy them at the weak side. When the market reaches an edge, banks take up the offer, the Aggregate Balance expands or contracts, and local interest rates move in the direction that pushes the currency back inside. The price of the arrangement is that Hong Kong cannot set its own interest rates.
Since 17 October 1983 the Hong Kong Monetary Authority has kept two standing offers open to banks: it will sell Hong Kong dollars at one published level and buy them at another, on request, without limit. Those two promises are the whole defence of the currency. Nothing in the arrangement depends on anyone's judgement on the day, and no capital controls sit behind it.
Key Takeaways
- The Monetary Authority gives banks two standing Convertibility Undertakings, at the strong and weak sides of the band.
- Interventions are begun by commercial banks taking up those offers, not by the Authority picking a moment.
- Inflows expand the Aggregate Balance and push interest rates down; outflows do the reverse. That is the correction.
- Hong Kong applies no capital controls, which is rare for a hard peg.
- The cost is monetary independence: interest rates follow the defence, not local conditions.
A promise rather than a policy meeting
The Linked Exchange Rate System has been in place since 17 October 1983, operated through a Currency Board arrangement.
Its core is a pair of standing commitments. The Hong Kong Monetary Authority undertakes to sell Hong Kong dollars to banks on request at the strong-side Convertibility Undertaking, and to buy Hong Kong dollars from banks on request at the weak-side one. The specific levels are published, and the AUD to HKD page carries them alongside the live reference rate.
What matters here is the character of the commitment rather than its numbers. These are open offers, not forecasts and not preferences. They do not express a view about where the currency ought to be. They are obligations, and the entire system rests on their being honoured whenever a bank chooses to take one up.
The intervention is started by somebody else
This is the part that inverts the usual picture. When commentary describes a central bank "intervening", it usually means the institution decided to act. Under a currency board of this design, the decision belongs to the commercial banks.
If a bank wants to buy Hong Kong dollars at the strong-side level, it may, because the offer is standing. If it wants to sell them at the weak-side level, likewise. The Authority does not choose the moment, the size or the direction. It honours whatever is asked of it at the published levels, and the flows follow from what the banks want to do.
That removes an entire category of uncertainty. There is no question of whether the authorities will defend the arrangement this time, because defending it is not an action they take.
The correction is automatic, and it runs through interest rates
Honouring the undertakings changes the quantity of money in the banking system, and that is what does the work.
When money flows in and the rate reaches the strong side, the Authority sells Hong Kong dollars for US dollars. The Aggregate Balance, which is the total of the clearing accounts banks hold with the Authority, expands. A larger balance pushes local interest rates down. Lower rates make holding the currency less attractive, demand eases, and the rate moves back inside the zone.
Outflows run the same mechanism in reverse. The Authority buys Hong Kong dollars, the Aggregate Balance contracts, interest rates rise, holding the currency becomes more attractive, and the rate is pulled off the weak side.
Nobody has to decide any of that. It follows from the undertakings being honoured.
Why no capital controls are needed
Now the two halves fit together. A peg maintained by restriction says: you may not move enough money to break this. A peg maintained by an automatic interest rate mechanism says: move whatever you like, and the price of money here will adjust until you stop wanting to.
The second is far more open, and Hong Kong applies no exchange controls at all. Anyone may hold the currency in any quantity, move it in or out without approval, and convert it through a bank. That combination - firmly fixed and fully convertible - is genuinely uncommon, because most jurisdictions that want a stable exchange rate buy it with restrictions instead.
What it costs
Monetary independence, entirely and by design.
If interest rates are whatever the defence of the exchange rate requires them to be, they cannot also be whatever local conditions call for. A currency board jurisdiction imports the monetary stance of the anchor economy. When the anchor is loosening, so is the board; when it is tightening, so is the board, whether or not that suits.
This is not a hidden flaw. It is the explicit trade, and a jurisdiction that wants an unarguably stable exchange rate against its anchor accepts it in exchange for that stability.
How to think about a currency board when you meet one
The word that does the work is obligation. A genuine currency board publishes a commitment it must honour on demand and backs the money it has issued with reserves of the anchor, so the correction happens whether or not anyone in authority wants it to that morning. Everything else described as a peg sits somewhere on a scale below that, where the defence is an intention the authorities may act on, and where the question of whether they will is live.
That is why the arrangement behaves so differently from a rate anchored on a parity that is recalculated each morning. One is a promise; the other is a decision taken daily. Both are called pegs.
Where to look next
The AUD to HKD page carries the live reference rate, the band levels and a short block on what kind of money the Hong Kong dollar is. For the general question of what makes any exchange rate move, what drives the Australian dollar covers it.
Sources
- Hong Kong Monetary Authority, How does the LERS work? - the strong-side and weak-side Convertibility Undertakings, the automatic interest rate adjustment mechanism, the role of the Aggregate Balance in expanding and contracting, and the behaviour of the system on inflows and outflows
- Hong Kong Monetary Authority, Linked Exchange Rate System - the system in place since 17 October 1983 and the Currency Board arrangement behind it
General information about how a currency board arrangement works. Not financial advice, and not a recommendation of any product or institution. Reviewed by the Tradergy editorial team, September 2026.
Common questions
How does a currency board work?
It commits to exchanging the local currency for an anchor currency on demand, at published levels, and backs the money it has issued with reserves of that anchor. Because the commitment is mechanical rather than discretionary, defending the arrangement is not a decision taken each morning; it is an obligation honoured whenever somebody asks.
What is a Convertibility Undertaking?
A standing promise by the Hong Kong Monetary Authority to deal with banks at the edges of the band. It undertakes to sell Hong Kong dollars on request at the strong-side level and to buy them on request at the weak-side level. Both are open offers rather than forecasts or preferences.
Who starts the intervention?
The commercial banks. Because the Authority has published standing offers, what looks from outside like intervention is banks taking up an offer that was already on the table. The Authority is not choosing a moment to act.
Why does Hong Kong not need capital controls?
Because the defence runs through interest rates instead. Inflows expand the banking system's Aggregate Balance and push local rates down; outflows contract it and push rates up. That movement changes the incentive to hold the currency, so the exchange rate is corrected without anyone being prevented from buying or selling.
What does the arrangement cost?
Monetary independence. A jurisdiction whose interest rates are determined by the mechanics of defending an exchange rate cannot also set those rates to suit its own economy. That is the trade, and it is accepted deliberately rather than suffered.