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USD/HKD Shrugs at US Peg Threat, Hang Seng Index Digests Surge

USD/HKD Shrugs at US Peg Threat, Hang Seng Index Digests Surge

Margaret Yang, CFA, Strategist

HANG SENG INDEX, USD/HKD, STRAITS TIMES INDEX:

  • Hang Seng index consolidating at key 26,000 support as US equities pull back
  • USD/HKD trades firmly at the 7.750 – the lower bound of the currency peg
  • Straits Times index little-moved before general election, consolidating at 2,650

Hang Seng Index, HKD Outlook:

Hong Kong’s Hang Seng Index (HSI) stock market benchmark is consolidating for a second day, finding support at 26,000 – the 61.8% Fibonacci retracement level. Negative sentiment from the US overnight is dampening risk appetite across the Asia-Pacific markets, with Covid-19 virus resurgence in North America and India in focus. Australia’s Victoria state premier has re-imposed Stage 3 stay-at-home restrictions for 6 weeks, underscoring the impact of a second viral wave on economic recovery.

Sector-wise, the Hang Seng constituents are trading mixedmid-day. Communication services (+2.62%), consumer staples (+2.54%) and information technology (+1.41%) leading the gains while consumer discretionary (-1.13%), industrials (-0.51%) were among the worst performers (chart below).

Hang Seng Index sector performance 8th July 2020

Source: his.com.hk, DailyFX

There are talks about a possible break of the Hong Kong Dollar (HKD) trading band this morning, with some White House advisors reportedly proposing to undermine the USD/HKD currency peg in order to punish Beijing for imposing a new security law on the city. USD/HKD was little-moved on the newshowever. It is trading firmly at 7.750 – the lower bound of the currency peg – as HKD remains in demand. Capital was seen to have poured into the HKD-denominated assets in the past few weeks, which partially explained the rally in the Hong Kong stock market.

Besides, the Hong Kong Monetary Authority (HKMA) has sufficient dry powder to defend the currency peg if needed. The central bank has US$ 437 billion worth of foreign reserves, or 121% of Hong Kong’s nominal GDP (chart below).

HK foreign reserve vs HK nominal GDP

Source: Bloomberg, DailyFX

Hang Seng Index –Technical Analysis

Technically, HSI has broken above a key resistance at 26,000 with strong volume on Monday, and subsequently entered into consolidation. The previous resistance is now becoming an immediate support level, and thus holding above 26,000 is critical in the next few days. The RSI indicator was overbought on Monday and thus suggested a technical correction is likely. The overall trend remains bullish as the 10-day, 50-day and 100-day Simple Moving Averages (SMAs) have likely formed a ‘Golden Cross’.

Hang Seng Index – Daily Chart

USD/HKD Shrugs at US Peg Threat, Hang Seng Index Digests Surge

Straits Times Index:

Singapore’s Straits Times index (STI) stock market benchmark followed US markets lower on Wednesday, trading at 2,650 with relatively thin volume. Investors are probably sitting on the sidelines ahead of a nation-wide election on Friday. Once the political skies clear, the stock market will likely find its own direction and start to move in tandem with the rest of Asia.

Technically, the STI is consolidating at around 2,600-2,700 with shrinking volume. Immediate support and resistance levels could be found at 2,600 (38.2% Fibonacci retracement) and 2,725 (50% Fibonacci retracement), respectively.

Straits Times IndexDaily Chart

USD/HKD Shrugs at US Peg Threat, Hang Seng Index Digests Surge
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--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

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

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