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Market Analysis

Fundamental Analysis: Indices Drive Small Loss for HKD

May 20, 2019
BY Michael Stark

The Hong Kong dollar has suffered some minor losses in today’s trading so far as the effect of heightened trade disputes is felt. Chinese and Hong Kong indices declined today, and weaker data has also affected HKD recently.

The US dollar moved back up against its counterpart in Hong Kong, above HK$7.849. The Hong Kong dollar also declined against the yen to about ¥14. EURHKD has been mostly flat today at HK$8.75, though, as the quote currency here is driven by its peg to USD.

Trade wars and shares’ decline

Journalists as well as traders have been analysing the possible impact of the Sino-American trade war on Hong Kong. The consensus for now appears to be that a continuation of high tariffs is likely to lead to a slowing in Hong Kong’s economy. Lower risk appetite among companies and so fewer new hires would lead to less consumer spending.

The more direct result of recent trade escalations though is on shares. Both Hong Kong’s Hang Seng Index and the mainland’s Shanghai Composite (SSE) have made significant losses since last week. Today’s session in Hong Kong saw the Hang Seng retreat below 27,800, a three-month low. The SSE has lost less but remains in the red this month overall.

Some of the biggest losers which drove these indices down are the companies affected or likely to be affected by tariffs. Focusing on the Hang Seng today, losers included Lenovo (-5.2%), BOC Hong Kong (-5.1%), and Geely Auto (-3.37%).

Weaker data in Hong Kong

Last week’s final figure for annual GDP growth confirmed the weakest release since the third quarter of 2009. 0.6% is slightly higher than the preliminary release, but still quite far below the initial forecast of 2%. Retail sales last Wednesday also missed the consensus by over a percent and YTD fixed asset investment was down slightly.

Shares set to drive HKD this week

More movements by the Hang Seng and SSE are some of the main factors that are likely to affect the Hong Kong dollar this week. More losses would probably be mirrored by the currency. However, positive news on trade wars could spur a bounce by the two key indices.

Although the company isn’t part of the Hang Seng, the dispute over Huawei might affect the Hong Kong dollar indirectly this week. An intensification of western sanctions against Huawei would be likely to hurt prospects for tech shares like Lenovo, Tencent, and others as well.

The most important data from Hong Kong this week is annual inflation. The figure is due on Thursday at 05.30 GMT. Not much change is expected from the previous 2.1%.

More small losses likely against the dollar and yen

The Hong Kong dollar’s fundamentals are overall somewhat negative, making a continuing downward movement favorable. USDHKD is very close to the permitted upper limit of 7.85, though. Traders should also remember that rate differentials are likely to generate headwinds for EURHKD.

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