The HKD under pressure

The situation unfolding in Hong Kong in recent weeks is the latest geopolitical concern to

rattle the markets and its put a considerable amount of pressure on the Hong Kong dollar-

the HKD. This has been fixed to the USD for over 35 years at a mid point rate of 7.80, but

with a trading band either side of that, set at 7.75-7.85.

Perhaps unsurprising therefore to find that the HKD and upper end of that band has come

under significant pressure in recent days as speculation mounts that the HKMA (the Hong

Kong Monetary Authority- the central bank of the province) may have to abandon the peg.

Understandably there’s been huge, real money outflow from the currency with many Hong

Kong residents looking to get their money offshore. However, speculators have been on the

case too and admittedly I have looked at this one myself via USD options above the peg. It’s

surely a tough call as to whether or not the HKMA will abandon the peg and left to their

own devices I am sure they wouldn’t let this happen, but it is entirely possible that Chinese

political pressure may force them to do so.

I am not sure quite honestly, but when one looks at the huge amount of reserves available

to the HKMA- close to half a trillion USD its easy to understand that they can and may take

the markets on as indeed they have many times successfully in the past. Meanwhile below

is a chart of the USDHKD price action over the past 30days.

Elsewhere this week the latest UK data has been pretty robust with good retail sales

numbers, unemployment and steady prices all helping to lift the GBPUSD back to as high as

1.2151 yesterday. However, the same cannot be said of the most recent German data, with

contracting Q2 growth and the latest ZEW survey both evidencing that all is not well in the

fatherland. There’s no doubting that these numbers helped to push the EURUSD back below

1.11 yesterday at the same time as the higher GBPUSD helped to drive the GBPEUR back

above 1.09, reaching as high as 1.0923. Indeed, the price is around 1.09 ahead of the

European opening this morning.

Meanwhile, and outside of the GBP, the dollar has also performed well this week. Some of

that is down to demand for USTs and some of it due to the fact that the dollar is clearly a

better residing place than the EUR just now given the corresponding yields. The element of

safety in terms of risk aversion has also helped the USD index trade back above 98, reaching

98.24 yesterday as the EURUSD tripped long stops below 1.1100. Notwithstanding that, the

JPY has seen the most action with some significant swings inside the week’s 105.05-106.98

range. Naturally that impacted all the JPY crosses too with some equally rapid price swings.

Even wilder swings in the equity markets this week have sure been rather unnerving at

times and the attempt by Trump to halt the sell off which saw him scaling back his tariff and

Chinese rhetoric did have the desired impact on Tuesday afternoon, but that didn’t last long

and any gains were soon relinquished over the next couple of days as the US two’s ten’s

bond spread went inverted for the first time in over a decade. The signal there is that

recession is on its way and that unnerved the markets even more.

Despite US 10 year yields remaining near their lows of 1.527% reached yesterday, the

simple fact is that negative yields elsewhere have moved even more- German 10years

minus 0.71%, Swiss minus 1.2% and just look a Greece with 10year yields below +2%,

currently at 1.98%- anyone want a piece of that one? I think not!

However, since the low points for equity markets yesterday afternoon, the ship has steadied

somewhat overnight and so far this morning, helped by the VIX (volatility index) coming

back from above 24, to close at 21.18 yesterday. The fact that equity markets have steadied

over the past 12 hours hasn’t done much damage to gold and still looks like the the markets’

destination of choice with yields tumbling around the planet. Oh, and why the EURNOK is

above 10 is beyond me quite honestly, but at some point I assume the penny will drop-

perhaps as long as oil doesn’t too much?

Well over a year ago now, I was listening to a very experienced and ‘seasoned’ technical

analyst, who back then was calling the top of the shop on the S+P to come in at 3,030. I

must admit back then, with the price still some way shy of that level I didn’t think he was

right and besides, I thought such an upside target rather ambitious.

Indeed, I have been arguing for it to top out before that level many times in various articles

and certainly no fan of equities this year. So, now when I note that the top this year has

been 3,026 I am again reminded of his call. It sure looks like he’s pretty much nailed it to me

and if he has then hats’ off to him. Furthermore, if he’s also correct about what unfolds

after that, then no prizes for guessing what’s coming next.

Important Economic Releases Due Later Today

16/08- 3.00pm US University of Michigan August Consumer Sentiment Index