Markets have accepted the refinements to the Linked Exchange Rate System calmly and positively, Monetary Authority Chief Executive Joseph Yam says, adding Hong Kong is in a better position to cope with shocks and achieve the monetary policy objective of exchange rate stability.

In his latest Viewpoint article on the authority's website, Mr Yam said constructive ambiguity on the strong side, while helpful in inhibiting speculative shorting of the Hong Kong dollar, is unhelpful when there is pressure for the currency to appreciate.

"The ambiguity represents a degree of uncertainty about the extent to which the exchange rate can strengthen, which is precisely one factor that generates speculative inflow into the Hong Kong dollar if there is a shock to the exchange rate on the strong side," he said.

"This uncertainty also lowers the sensitivity of the flow of funds into and out of the Hong Kong dollar in response to the interest rate differential between the Hong Kong dollar and the US dollar when the exchange rate is stronger than 7.8."

Mr Yam said the strong-side Convertibility Undertaking to buy US dollars will remove the uncertainty about the extent to which the exchange rate may strengthen. Consequently, it should increase the sensitivity of the flow of funds into and out of the Hong Kong dollar to the interest rate differential between the Hong Kong dollar and the US dollar.

He expects large flows in and out to continue, for as long as the reform of the renminbi exchange rate system is still on the agenda. There will be other shocks that will generate similar flows in either direction, he added.