Here We Go Again: USD Pressure in HK, China Slowdown, Breaking 7 is Back

SCMP: Hong Kong’s monetary authority sells US dollars to prop up local currency, the first intervention since August 2018 as rate gap widened

Hong Kong’s monetary authority has sold HK$1.5 billion (US$191 million) of US dollars in the foreign-exchange market to prop up the local currency’s value against the greenback, the first intervention by the city’s de facto cental bank since August 2018.

The move, undertaken through the “weak-side convertibility undertaking (CU),” was triggered when the local currency touched 7.8500 per dollar, the lower limit of a trading band in place since May 2005. The aggregate balance of Hong Kong’s currency reserve would fall by HK$1.5 billion to HK$74.802 billion after the intervention, the Hong Kong Monetary Authority (HKMA) said in a statement on Saturday.

The local currency weakened to touch the lower limit of the trading band because a decline in banks’ funding demand had led to a drop in interbank rates for Hong Kong dollars, which widened the gap between local-currency and US dollar deposit rates. The gap in overnight rates was between 150 and 200 basis points, while the difference in 1-month rates was at about 150 basis points.

Last year, HKD was in a slow motion crash towards the lower bound of the peg. It got there in late March. China cut its RRR a month later and the U.S. dollar began a broad rally against everything. Emerging markets went down and didn't bottom until six months later.

Alhambra: The Big Minus Wasn’t Actually China’s Big Contraction In Exports

In the space of maybe six or seven months, everyone goes from huge global boom to maybe some slowing to China is outright contracting. And is still contracting after the full reach of its New Year holiday.

The effects have already been profound; the ECB yesterday singling out weak Chinese demand for it having to unleash a third (absurd) T-LTRO in place of a booming monetary policy exit. The OECD did the same when downgrading its forecasts for the global economy.

So, what is China’s problem? There’s trade wars and record (misleading) Total Social Financing, confusing monetary policies where banks are issuing bonds that are really equities and the central bank is swapping them for bills that are bonds but belonging to the central bank. There does seem to be a confusing mess coming out of Beijing.

...Much more than US GDP or payrolls, Europe’s LTRO’s (naked, or with a T) or Jay Powell’s chicken pause, Chinese demand for foreign commodities and goods more than suggest this thing is just getting started. What it actually might be when all is said and done, we don’t know. But the probability of just bouncing off a small, temporarily annoying global soft patch is very much diminished with China spreading this kind of persisting disorder and distress throughout the rest of the world.

The final piece to the puzzle is yuan depreciation, but I do not expect any while trade negotiations are ongoing unless this turns into a really big deal that allows U.S. tariffs to offset yuan depreciation with no retaliation, something that the U.S. said it wants, but isn't part of any agreed upon points made public.

There's only about 1.2 percent of appreciation left for CNH/EUR before it hits a resistance line that marked peaks in 2016 and 2018. Assuming a reversal, it could come as early as next week given the volatility of EUR/USD.

When CNH/EUR declines because CNH tracks with weaker USD it has been good news for global markets and the global economy. When CNH drops against both EUR and USD, the "double depreciation" that started slowly in April 2018 and all at once in August 2015, it has been bad news. If the U.S. dollar continues to strengthen against the euro, it looks like the yuan is about to weaken. Emerging markets are about to significantly underperform U.S. stocks. Moreover, if the current level of EUR/USD holds and CNH/EUR retraced to its 52-week lows, it would take USDCNY through 7.00. There are many moving parts in currency markets, but if DXY achieves a bullish breakout here, watch out.