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USDHKD has tumbled sharply below 21-EMAs, the bears have retraced more than 50% Fibonacci retracements of 2015 lows and 2018 highs but managed to pare the losses as currently trading at 7.8106 levels. While HKMA is seemingly winning the battle to defend the Linked Exchange Rate System. USDHKD is now trading around 7.81, the mid-point of the 7.75-7.85 trading band, while it was hovering at the upper limit at 7.85 since April. The effort to drive up the cost of funding for HKD appears to be bearing fruits.
For instance, 3m HIBOR is currently about 25bps lower than 3m LIBOR, while the widest gap was more than 100bps seen earlier this year. Due to continuous liquidity withdrawal, commercial banks in Hong Kong are set to raise the prime rate (the best lending rates to the customers) for the first time since 2006. Against this backdrop, the HKD bears started to unwind the HKD short positions, sending the USDHKD spot to close 7.80 mark.
Strategically we continue to trade Hong Kong FX and rates on the long side for the strong fundamentals, but rotate our expressions given the moves today: We square our long HKD FX position (Short USDHKD 3m fwd entry 7.8320, today spot 7.8095, total return +145pip including carry) after the spot appreciation.
We hold onto our HKD 1y1y IRS receiver, currently at 2.99%. While there could be more spikes in overnight FX points due to the lower aggregate balance, positive HKD t/n points in a sustainable manner is not warranted given Hong Kong’s very strong external balances, and HKD short-dated swap points are likely to stabilize at lower levels when market digests the price actions and volatility comes down to more normal levels. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly EUR is inching at -43 (which is bearish), USD spot index is flashing at 73 levels (which is bullish), while articulating (at 14:02 GMT). For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
