HKD peg: Re-evaluation forecasting
Updated
Another currency in China's tool kit is not being discussed enough. With the current trade war escalating to a global currency crisis coupled to a technology war, and market listings. Reserves of the HKD have been depleted in previous defence of the HK/USD peg.
Note
"After fighting a trade war with the United States for more than a year, Chinese officials have long realised that the best precaution against Donald Trump’s presidency of wilful unpredictability is to liken it to a natural disaster. While it is hard to predict when or how a disaster strikes, one should think of all possible ways to prepare for the worst and mitigate risks in case it happens."Note
USD/CNY passing 7.0 shows that China is going to fight this trade war hard, at least while President Trump is in office. There is a chance, in the medium term, that the yuan could weaken further if:1. The trade war escalates even further and the Chinese government uses the yuan to create market volatility. This could be a tool to frustrate Trump's 2020 re-election campaign.
2. The Chinese government has a plan to compensate for the loss of economic activity caused by the trade war. Asset market turmoil, led by a far weaker yuan, may not hurt China so much as it hurts the US.
Note
China’s central bank is justified in arguing that last Monday’s yuan slide was more the result of market forces as the Chinese economy has been heavily hit by Trump’s decision to impose punitive tariffs on Chinese imports, with more to come in September.Note
China’s central bank governor Yi Gang said Beijing would not resort to exchange rates in handling external uncertainties, including trade disputes, and promised to keep the yuan stable. While Yi’s words brought relief to international markets, China has used the international turbulence from the yuan’s fall to send a clear warning to the US.Note
Hence, as Hong Kong is part of China, the PRC could be looking at changing the anchor currency for the HKD; swapping USD out, replacing it with CNY.Note
Hong Kong MA and China have plenty of USD reserves to play with!
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