Despite extradition protests, China’s economic stimulus and US monetary policy easing leave Hong Kong well placed

China’s stimulus measures and the US Fed’s expected interest rate cut are likely to boost the Hang Seng Index, which in turn will support the Hong Kong dollar. Traders shorting the currency should rethink their strategy

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Deputy chief executive of the Hong Kong Monetary Authority Howard Lee Tat-chi explains the features of new Hong Kong banknotes at Two International Finance Centre, in Central on July 24. Photo: Sam Tsang

Published: 11:35am, 18 Jun 2019Updated: 10:34pm, 18 Jun 2019

Markets always have to react. Attacks on oil tankers in the Middle East prompt a higher oil price. China unveils measures to boost automobile sales and the price of palladium is affected. But, while immediate market reactions are perfectly rational in the moment, those decisions may not stand the test of time.

Take Hong Kong for example. Clearly, last week’s use of beanbag rounds, rubber bullets and tear gas in Admiralty was hardly going to elicit a positive reaction from investors, and the Hang Seng Index duly came under pressure.

Yet, if Hong Kong hadn’t been beset by controversy over the proposed extradition bill, there’s a persuasive argument that, rather than having downside concerns, investors should instead be focusing on the near-term potential upside for Hong Kong assets.

In the currency space, the Hong Kong dollar, managed by the Hong Kong Monetary Authority within a HK$7.75-7.85 band versus the US dollar, was already at the HK$7.85 end of its set range before the present situation developed.

“It’s worth remembering that the Hong Kong dollar has been under pressure for virtually all of this year, with spot stuck close to the edge of the band from late January onward,” Simon Derrick, chief currency strategist at US bank BNYMellon wrote last Thursday.

So unless the HKMA is prepared to abandon its long-standing policy towards the Hong Kong dollar, even if recent Hang Seng Index weakness owed something to overseas disinvestment, any resulting capital outflow couldn’t result in further Hong Kong dollar weakness being reflected in its value versus the greenback.

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