USD/HKD holds steady as Fitch downgrades Hong Kong; lockdown extended

Written by: Crispus Nyaga
September 9, 2020
  • The USD/HKD held steady after Fitch downgraded HongKong from AA to AA-
  • Hong Kong government condemned Fitch, saying that the downgrade was not necessary
  • The government extended the coronavirus lockdown by another 14 days.

The USD/HKD pair held steady after Fitch downgraded Hong Kong’s debt. The pair was also little changed after the government extended the lockdown by seven more days.

Hong Kong dollar steady
USD/HKD steady after credit downgrade by Fitch

Fitch downgrades Hong Kong

Fitch, a credit rating company, downgraded Hong Kong’s credit from AA to AA- and reiterated its outlook for the city as stable. The company cited the impact of last year’s protests and the current coronavirus pandemic.

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In the statement, Fitch said that it expects Hong Kong’s economy to slide by 5% this year after dropping by 1.2% in 2019. It expects the economy to bounce back in 2021, rising by 3.5%. The report attributed the outlook to less visitor arrivals, low retail sales, and the hampered international trade. The report said:

Efforts to contain the spread of the virus locally appear to be gaining traction, but risks to our forecast remain to the downside and dependent on the evolution of the pandemic globally, given Hong Kong’s status as a small, open economy, with significant international trade and financial linkages.

The credit downgrade, the first since the last financial crisis came at a time when Hong Kong is going through many challenges, including increasing unrest. According to CNN, the unrests were likely to resume in the next few months as the economic situation for most people remain dire. According to Fitch, the city has yet to solve the deep-rooted socio-political cleavages, which will prolong the period of recovery.

In a statement today, Hong Kong government disputed the claims by Fitch saying,

“The decision reflects a ­disproportionate emphasis on ­prevailing sociopolitical issues without giving due recognition to the strong fundamentals underpinning the local economy and financial market,”

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Hong Kong Extends Lockdown

The Hong Kong dollar held steady even as the government announced new measures to extend the lockdown by fourteen days. The government said the new extension was necessary as it continues to battle the unseen enemy.

The extension came at a time when new infections in Hong Kong have declined. According to Worldometer, Hong Kong has recorded just 1,026 cases and four deaths. 630 of the confirmed cases have recovered. Also, the number of new infections has declined. Yesterday, the city confirmed two people, which is an incredible number for a city that is close to mainland China.

Experts believe that the city was successful because it emphasized on mass testing earlier on. It quarantined those who tested positive, traced their recent contacts, and asked them to isolate. It was the same approach used by South Korea. This is partly the reason why the Hong Kong dollar has remained quite steady against the USD.

The Hong Kong government has also put in place fiscal measures to cushion businesses. This month, the government announced a new round of fiscal stimulus worth more than HKD 137 billion. This is equivalent to 4.8% of the total GDP. These funds went to businesses and the public. The new stimulus followed another HKD 120 billion that was announced earlier this year. As a result, the increased spending will cause the deficit to rise to 11% of the total GDP, which is double than in the previous year.

The central bank has also announced new measures. It has brought interest rates to 0.86% and announced more measures to provide liquidity in the market. It did this by releasing more than $64 billion into the market.

USD/HKD technical outlook

USD/HKD technical
USD/HKD technical outlook

The five-year chart shows that the USD/HKD pair has dropped to the lowest level since January 26. This is mostly because of how resilient Hong Kong has in dealing with the pandemic. The pair is significantly below the 50-day and 100-day exponential moving averages while the RSI has fallen to the oversold level. The likely scenario is where the downward pressure continues, which will see it move below the support of 7.7500.