- The USD/HKD pair is little changed as traders react to the upbeat manufacturing PMI data from Hong Kong.
- The PMI rose to 49.6 from the previous 43.9 as manufacturers reopened their businesses.
- The biggest challenge for Hong Kong is the recently passed security law by Beijing.
The USD/HKD pair is little changed today as traders reflect on the upbeat manufacturing PMI data from Hong Kong. It is trading at 7.7500, the lower limit of the Hong Kong dollar peg. The US dollar index is down by more than 0.20%.
Hong Kong manufacturing PMI rise
Manufacturing activity in Hong Kong rebounded in June as the city eased movements on travel. According to Markit, the manufacturing PMI rose from the previous 43.9 to 49.6 in June. That was the highest it has been since April 2018.
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Still, with the PMI currently below 50, it means that the sector is in the contraction territory. Manufacturing output fell in June, partly because of the social distancing measures that are still in place.
Also, new orders declined, albeit at a slower pace than in the previous month while new export orders declined at a marked pace. Unlike in other countries, labour conditions in Hong Kong were relatively stable. And firms were less pessimistic about the future, with business confidence rising to a five-month high. In a statement, Bernard Aw of Markit said:
“Business activity and new orders both declined at the slowest rates since the first half of 2018 before the escalation of the US-China trade tensions. Private sector employment levels also stabilised while firms raised their purchasing activity for the first time in over two years.”
“As such, the potential of a robust recovery in the Hong Kong economy relies on the strength of the upturn in the global economy in the coming months.”
However, it is worth noting that manufacturing plays a small role in Hong Kong. It is responsible for less than ten per cent of the GDP. Instead, the key pillars of the economy are in financial services, tourism, trading, and logistics. These sectors employ more than 1.78 million people in the city and generated value added of more than $1,547.6 billion in 2018.
Hong Kong economy still struggling
Meanwhile, in a statement the economic minister warned that Hong Kongers must be prepared for more economic hardship. He warned that any recovery will depend on how the city manages its health crisis. He said:
“We have not yet seen a major recovery. Whether the [economic] situation will continue to slide or be contained, it depends on the pandemic. If the coronavirus worsens, people will lock themselves down to protect themselves, particularly in Hong Kong.”
A key challenge in Hong Kong is about the recently passed security law. Analysts are torn about its impacts. On one hand, some analysts believe that the law will lead to stability by limiting protests and political instability. On the other hand, some believe that it will lead to brain drain and low foreign investments.
USD/HKD technical analysis
To starters, the USD/HKD pair is different from other major currency pairs like the EUR/USD and GBP/USD. That is because the Hong Kong dollar has been pegged to the US dollar for decades. Therefore, it moves depending on the actions by the city’s monetary authority.
On the daily chart, the pair has remained unchanged since June and is along the 100-day and 50-day exponential moving averages. Therefore, I expect it to remain at the current levels in the medium and long term.