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Financial and Monetary Affairs
that is, the rate for strong-side Convertibility Undertaking. While the unexpected results of Britain's referendum vote to leave the European Union and the US presidential election sent shock waves through global financial markets in late June and early November respectively, the HKD remained strong against the USD, with the exchange rate staying between 7.75 and 7.76 most of the time. Only when the US Federal Open Markets Committee raised interest rates again in December 2016 did the HKD ease slightly along with weakness in other Asian currencies on expectation of a possibly faster pace of US interest rate rises ahead. Overall, the HKD to USD exchange rate moved mostly between 7.75 and 7.82 during 2016, before closing the year at 7.7545.
The Convertibility Undertaking was not triggered during the year and interbank liquidity continued to remain abundant, given significant inflows over the past few years. Yields of short-dated Exchange Fund Bills (EFBS) traded at very low levels. To meet banks' strong demand for the papers, the HKMA issued $132 billion of additional EFBs, raising the outstanding amount of Exchange Fund papers to $962.4 billion at the end of 2016 from $829.6 billion a year ago. The additional issuance was well received by the market and had little impact on HKD money market conditions. The aggregate balance fell correspondingly from $391.3 billion at the end of 2015 to $259.6 billion at the end of 2016, while the monetary base remained largely unchanged at $1.6 trillion.
HKD wholesale deposits were traded actively among local Als, and between local and overseas Als, recording an average daily turnover of $287.5 billion in 2016. Amid ample liquidity in the money market, short-dated HKD interbank interest rates were steady throughout the year, with intermittent fluctuations due to equity fund-raising and seasonal liquidity demand. Nonetheless, longer-dated HKD interbank interest rates rose in January and in the fourth. quarter, reflecting primarily a catch-up with the increases in the USD interbank interest rates. Overall, the HKD money market and forex market continued to operate in an orderly and smooth manner.
Exchange Fund
The fund's primary statutory role under the Exchange Fund Ordinance is to affect the exchange value of the HKD. It can also be used to maintain the stability and integrity of the monetary and financial systems, with a view to maintaining Hong Kong as an international financial centre.
The HKMA is responsible to the Financial Secretary for the use and investment management of the Exchange Fund. To meet the objectives of preserving capital, providing liquidity to maintain financial and currency stability and generating adequate long-term returns, the fund is managed as distinct portfolios. The Backing Portfolio holds highly liquid USD-denominated debt securities to fully back the monetary base. The Investment Portfolio aims to preserve the fund's long-term purchasing power.
The fund's asset allocation strategy is guided by an investment benchmark approved by the Financial Secretary on the advice of the EFAC18, A Strategic Portfolio holds all HKEX shares
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The
management and investment style of the fund are explained in the HKMA's annual report.
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