USD/HKD stuck at 2016 lows as Hong Kong records worst recession ever

USD/HKD stuck at 2016 lows as Hong Kong records worst recession ever
  • The USD/HKD pair is stuck at the lowest level since 2016 after the weak GDP data.
  • The Hong Kong economy declined by 8.9% in Q1, which was the worst contraction ever.
  • The economy is dealing with last year's protests and the ongoing coronavirus pandemic.

The USD/HKD pair held steady at the lowest level since 2016 even as Hong Kong GDP data disappointed.

Hong Kong dollar stable
USD/HKD at 2016 lows

Hong Kong GDP data disappoint

Hong Kong economy contracted by 8.9 per cent year on year in the first quarter, data from the statistics office showed. The economy shrank by 5.3 per cent quarter on quarter. These numbers were in line with the first reading that were released in April.

This contraction was the city’s worst performance since the bureau started recording the data. It was also worse than the 7.4 per contraction experienced in 1998 during the Asian financial crisis.

These numbers come two days after the city’s commerce minister warned about the health of the economy. In an interview with the South China Morning Post, Edward Yau Tang said that the second quarter will not be any better because business activity has not improved. It also came a month after the Finance Secretary warned that the city was facing its worst recession ever.

The numbers came on the same day that China released better-than-expected industrial production data. The numbers showed that the country’s industrial production rose by 3.9 per cent in April, the best performance this year. This performance was better than the 1.5 per cent that analysts were expecting. Another data showed that retail sales dropped by 7.5 per cent in April, after dropping by 15 per cent in March.

The USD/HKD also reacted to weak trade numbers from the city yesterday. The data showed that volume of total exports and imports declined by 4.6 per cent and 10.3 per cent respectively in March.

Hong Kong double punch

The Hong Kong economy has faced a series of problems in the past two years. In 2019, activity in the city came to a stand-still because of the protests. Millions of Hong Kongers were protesting a new extradition bill that was being suggested by the government. They believed that the bill would be used by China to arrest innocent people. As a result, the economy contracted by more than 1 per cent in 2019.

This year, the city has had to deal with the coronavirus pandemic that has infected thousands. Subsequently, most businesses have remained out of business and most sectors have been affected. The worst-affected are the airlines and hotels. For example, Cathay Pacific lost more than $580 million in the past four months. And the company is still losing money.

The real estate industry has also been affected because many retailers and companies are not paying rent. Also, with travel halted, many hotels are not making any money.

As a result of all these, the USD/HKD pair reacted to a rate downgrade by Fitch in April. The agency lowered the rating from the previous AA to AA-. The statement said:

“Fitch forecasts real GDP will fall by 5% in 2020, following a 1.2% decline in 2019. High frequency data spanning retail sales, visitor arrivals, airport traffic, and international trade have contracted sharply in early 2020, following declines in 2019, and are likely to remain weak through the first half of the year.”

At the same time, the government has initiated a large stimulus package while the Hong Kong Monetary Authority has brought interest rates to a historic low of 1.50 per cent.

USD/HKD technical outlook

USD/HKD technical outlook

The USD/HKD has declined sharply due to the current crisis. It is now trading at 7.7500, which is its lowest level since 2016. On the daily chart, the price is below the short and longer-term moving averages while the RSI has been relatively stable. The pair may remain at the current level as the market waits on the Hong Kong recovery.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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