August 08, 2022

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Hang Seng Index & The HK-USD Peg

  
 
Seeing Hang Seng keep on plunging day after day, breaking resistance after resistance, I felt there is something questionable. Everything doesn't add up. After some level of analysis and research, I realised something important is going on in the market. Just to give you all some insight to the sell down in Hang Seng index:

1. The HKD is pegged to the USD. However, there is a major divergence that is happening now. 
 
Although HKD is pegged to the USD, US is currently hiking their interest rate whereas China is devaluing yuan after being incorporated in IMF. China's reason to devalue yuan is to make their export more competitive. This is one of their major ways to improve their on domestic growth concerns. On the other hand, the short sellers in the market is looking to exploit the growth concern of China to short the HKD. To maintain the peg between HKD and USD, HK policy makers have to either increase interests rate in tandem or continue to use their FOREX reserves. Although HK does have huge amount of FOREX reserves, China is not helping the case with their continuous devaluation of Yuan. 

2. As HKD is coming under attack by shorters, the equities market in Hong Kong clearly will trigger panic selling due to the fear of potential meltdown esp how it was during the 97 Asian Financial Crisis. Hence, there is constant sell down through out. 

3. Shorters of HKD will continue to attack the peg citing China growth concerns as a reason and the divergence between the China govt's devaluation of Yuan vs the US Fed's interests rate hike. This selling will continue until the divergence in policy is addressed by Hong Kong authorities.

 
4. Think back Malaysia's own market plunge in August 2015. Our currency plunge tremendously against the USD whereby shorters cited 1MDB,  oil plunge as the key reason for the weak outlook of Malaysia. This led to the massive sell down in the KLCI equities to a point of 1500 before it moderated. Hence, the correlation between the currency of a nation and the equities market works hand in hand. 

5. The question now is, will Hang Seng rebound and the will the HKD-USD peg survive? In my opinion, yes. Simply because the HKD-USD peg is one of the strongest in the world that has survive various financial crisis, like the SARS, Global Financial Crisis. In addition, Hong Kong has big brother China as the support. China government will not allow their economic bastion to face such challenge. It would tantamount to a challenge on their sovereignty. 

6. I am of the view that the Hang Seng index will rebound soon and the attack on the peg by short sellers of the HKD will ease. When the selling ease, the equities market will start to rebound. However, this can only happen if the divergence of policy between China devaluation of Yuan and US Fed Rate Hike is satisfactorily addressed by authorities.        
 
 
Food for thought: 
 
 
 
2016 Outlook
When Fear Sweeps The Market (Upside vs Downside)

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