Fundamental Analysis: Hong Kong Dollar Declines as SSE Retreats

The Hong Kong dollar has posted losses against most major currencies since yesterday afternoon. This comes mainly as a result of the pullback in indices. HKD’s slight decline is in spite of Hong Kong’s lower trade deficit released earlier today.

At HK$7.849, USDHKD is very close to the top of its permitted range at the time of writing, a five-month high. EURHKD has also advanced above HK$8.92 and HKDJPY posted relatively major losses in the Asian session to ¥14.11.

Shares’ breather capping HKD

One of the main drivers of the Hong Kong dollar’s value is that it’s used to buy both Hongkonger shares and mainland Chinese shares listed in Hong Kong. In this context, the slight decline of the Hang Seng and Chinese indices in today’s session was a negative factor for HKD. The Shanghai Stock Exchange Composite Index (SSE) in particular lost around 20 points this morning.

Another possible factor behind HKD’s recent losses is the gains made by the offshore yuan (offshore renminbi; CNH). The higher interest rate associated with CNH and the currency’s improving fundamentals amid trade talks appear to have encouraged many traders to start buying the other main currency of Hong Kong. However, traders should be cautious not to put too much stock in this factor alone.

The main positivity for the Hong Kong dollar today has come from data. This morning’s release of the figure for HK’s trade deficit was the lowest in over seven years at HK$10.3 billion. Traders have also noted last week’s data, which revealed that unemployment in Hong Kong is stable at 2.8%. On the other hand, inflation last week came in very slightly lower at 2.4%.

Shares and GDP data in focus this week

Shares in China and Hong Kong seem to have been seeking direction this morning. Yesterday’s lively gain by the SSE of more than 5.6% will probably not be repeated soon. That said, traders should monitor how HKD reacts to lesser movements in the stock market.

The key data from Hong Kong is tomorrow’s GDP growth rate. Both quarterly and adjusted annual figures are expected for Q4 2018 at 03.30 GMT tomorrow. The consensus at the moment is for a gain of 0.4% in the QoQ figure and also a gain of 0.3% for the annual growth rate. If these estimates are accurate, the Hong Kong dollar might well recover somewhat from recent lows.

More small losses expected

Based on fundamentals in general, the most likely direction for HKD this week is downward. Traders should not miss tomorrow’s data, though. These key releases have the potential to cause significant volatility and possibly a bounce for the Hong Kong dollar.

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