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USD, JPY May Rise as US-China Tension Over Hong Kong Escalates

USD, JPY May Rise as US-China Tension Over Hong Kong Escalates

2020-05-29 06:30:00
Dimitri Zabelin, Analyst
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US Dollar, Hong Kong, US-China Relations, Coronavirus – TALKING POINTS

  • US Dollar and Japanese Yen may rise as US and China lock horns over Hong Kong
  • Beijing, Washington risk slipping into another tit-for-tat relationship amid pandemic
  • EUR/USD has broken above a key inflection range with follow-through: what next?

Asia-Pacific Recap

Asia-Pacific markets appeared to have a risk-off tilt in market mood early into Friday’s session as the anti-risk Japanese Yen and Swiss Franc edged higher at the expense of US equity futures. APAC stocks were also trading in red as investors grew more anxious about the widening rift between the US and China. The political catalyst appears to be concern about Hong Kong and its autonomous status.

US Dollar, Japanese Yen Brace for Escalating US-China Relations

Growing hostility between the US and China over Hong Kong may sour market mood and put a premium on anti-risk assets like the US Dollar and Japanese Yen and a discount on their growth-oriented counterparts. The cycle-sensitive Australian and New Zealand Dollars in particular are at risk given their home countries are strongly reliant on Chinese demand.

Secretary of State Mike Pompeo said Hong Kong was no longer autonomous from China in light of Beijing’s intent to insert new legal provisions into the region’s constitution. This has been met with pushback from numerous US officials including President Donald Trump. On Thursday, he announced a press conference that will take place later today about China and its recent actions.

Relations between the two were already strained amid the coronavirus pandemic and before then were at best cautiously neutral following the passage of “Phase 1” of the US-China trade deal. Now, those tensions are escalating over Hong Kong and will likely be exacerbated following a controversial bill signed by the House of Representatives.

The piece of legislation authorizes sanctions against Chinese officials involved in the abuse of Muslim minorities known as Uighurs. There are also other bills that involve targeting China-based technology companies like Huawei, who’s CFO Meng Wenzhou just recently suffered a blow from Canada’s court system that ruled that the case for extradition to the United States can go forward.

China is also experiencing a breakdown in diplomatic relations with its Australian neighbor that has called for an international investigation into how the Asian giant handled the coronavirus pandemic. Fighting on almost all fronts, Beijing will likely now have to put on a show of strength which will likely lead to more geopolitical friction that investors will scramble to price in. Learn how to trade the impact of politics on markets here.

Going back to Hong Kong, there is concern that the autonomous region may become a geopolitical bottleneck that could hinder cross-continental capital flows and expansion into the Chinese market. Investors also have to face the prospect that escalated tensions may cause the détente to deteriorate into direct, targeted economic measures. It is not unreasonable to think that the trade war may be resurrected and haunt markets again.

EUR/USD Analysis

EUR/USD has broken above a key inflection range between 1.0981 and 1.0989 with follow-through after bumping against it and support at 1.0783. The pair will now have to surmount resistance at 1.1147 (purple-dotted line) which could then open the door to retest a key ceiling at 1.1287. If barrier is also cleared, the next peak to scale may be the one-year swing-high at 1.1447.

EUR/USD – Daily Chart

Chart showing EUR/USD

EUR/USD chart created using TradingView

--- Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitriTwitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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