USD/HKD skyrockets as China goes rogue on Hong Kong; protests expected

Written by: Crispus Nyaga
May 22, 2020
  • USD/HKD pair rose ahead of the annual National People's Congress meeting.
  • China is set to impose national security in Hong Kong, which will lead to protests.
  • The new crisis comes at a time when Hong Kong is battling the coronavirus pandemic

The USD/HKD shot up as the market remained concerned about protests in Hong Kong. Hong Kong stocks too nosedived, with the Hang Seng index, which dropped by more than 4%.

USD/HKD rises
USD/HKD reacts to Hong Kong crisis

USD/HKD rises as Hong Kong crisis escalates

The USD/HKD pair rose sharply after the Xi Jinping government said it planned to impose national security in Hong Kong. The reports emerged ahead of the National People’s Congress meeting that is set to start today.

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Analysts believe that the unprecedented move will be condemned by Western countries, including the United States. In a statement, Donald Trump said that he would “address that issue very strongly.” They also anticipate that Hong Kong residents will protest in a bid to attract international attention.

According to sources, the new move will target subversion, terrorism, and foreign influence. As a result, Chinese security officials will set up offices in the city, irking residents.

What happened in Hong Kong?

For starters, Hong Kong once belonged to the United Kingdom. After years of negotiations, the British agreed to return the city to China under a new system, one country, one system agreement. This agreement allowed Hong Kong to be an autonomous region, with its own government, the justice system, and currency. After 50 years, Hong Kong will integrate with the rest of China.

As a result of this arrangement, Hong Kong became an important city in the world stage. That is because it was viewed as the direct entry or gateway to China. This led to international companies eying expansive China to set offices there. Today, you will find companies like Goldman Sachs, Morgan Stanley, and JP Morgan there.

However, China has been eying the city for years. A few years ago, Chinese authorities financed the longest bridge connecting the city with Macau and Zhuhai. It also proposed loyal leaders to the Hong Kong parliament.

Last year, protests emerged after the pro-China government proposed a new extradition bill. Hong Kongers believed that the bill would allow China to arrest and jail people unilaterally.

As a result of these protests, travel to the city declined, and many retailers and hotels were affected. In 2019, the city’s GDP contracted by more than 1.2% in the year. The USD/HKD strengthened because it is pegged to the US dollar.

Coronavirus impact on Hong Kong

The USD/HKD pair has been relatively strong this year because of the arrangement mentioned above. Indeed, the pair is trading close to its 2017 lows.

The coronavirus pandemic has affected Hong Kong economy significantly. Travel has dropped to almost zero per cent, and Cathay Pacific has been burning millions of dollars every month. Many hotel chains have closed, and there are risks that the housing bubble could burst. As a result of all these, Fitch decided to downgrade the city.

In a statement, the rating agency said that it expects the economy to contract by an unprecedented 5% this year. They expect a modest 3.5% recovery in the coming year. The recent government borrowing of HKD 257 billion will weigh on the recovery. The analysts said:

“This injects lingering uncertainty into the business environment, and entrenches the risk of renewed bouts of public discontent, which could further tarnish international perceptions of the territory’s governance, institutions, and political stability.”

USD/HKD technical outlook

USD/HKD forecast

On the five-year chart, the USD/HKD pair is slightly above this year’s low of 7.7486. The price is slightly below the 23.6% Fibonacci Retracement level and significantly below the 50-day and 100-day exponential moving average. There is a possibility that the currency pair will attempt to test the 23.6% Fib at 7.7720.