Market News & Analysis

Top Story

Is USD/HKD Nearing its 2015 EUR/CHF Moment?

As my colleagues have mentioned in recent days (see here and here), the ongoing protests in Hong Kong are reaching a critical level, with major implications for essentially every global market.

For the second straight day, flights out of Hong Kong have been suspended while Chinese military forces gather in nearby Shenzen. The continued shutdown of the global financial hub and the potential for further escalation raises the risk of a severe economic disruption in the region. It also limits Chinese leaders’ bandwidth to focus on the escalating trade war with the US, explaining some of the broader market implications.

But are FX traders ignoring the pair that may be most impacted by the ongoing Hong Kong protests?

For over 25 years now, the Hong Kong dollar has been pegged to the US dollar. Its current trading band, between HK$7.75 and HK$7.85, has been in place since May 2005 and has never been broken or even severely tested. Given the Hong Kong Monetary Authority’s (HKMA) massive war chest of reserves and exchange fund bills, investors have had little reason to question the stability of the peg…until now.

Source: TradingView, City Index

Now, the ongoing turmoil and risk of military intervention by the People’s Liberation Army (PLA) is prompting Hong Kong residents and firms to consider moving capital out of the region. This selling pressure forces the HKMA to buy Hong Kong dollars to defend the peg, depleting its reserves. If the situation continues to escalate and capital outflows accelerate, the central bank may eventually be forced to drop its peg, which could lead to a dramatic weakening in the HKD (surge in XXX/HKD).

FX traders need not look back too far for a rough (if inverse) analog: after prohibiting EUR/CHF from dropping below 1.20 for over three years, massive capital inflows forced the Swiss National Bank to abandon the cap on the value of the Swiss franc in January 2015, leading to an immediate 20% surge in the CHF. The moral of the story is that massive market flows into or out of a region can overwhelm even the most well-capitalized of central banks.

Of course, the peg appears stable for the moment, and the HKMA still has plenty of reserves to deploy as needed. But much like the EUR/CHF situation from a few years ago, traders should consider all scenarios and evaluate whether a speculative position in USD/HKD, an asymmetric risk/reward position with a geopolitical catalyst, may make sense.


Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

GAIN Capital Singapore Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the GAIN Capital group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), GAIN Capital Singapore Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact GAIN Capital Singapore Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither GAIN Capital Singapore Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

GAIN Capital Singapore Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.

Important Notice:

Cryptocurrencies are not legal tender currency and trading of derivatives on Cryptocurrencies are currently not covered under any regulatory regime in Singapore. Consequently, investors should be aware they do not have protection under the Securities and Futures Act (Cap. 289). Please ensure that you are fully aware of the risks.